Changes in Capital Gains Tax

Newsletter issue - June 2010.

The Coalition Programme for Government, published on 20 May 2010 contains this pledge:

We will seek ways of taxing non-business capital gains at rates similar or close to those applied to income, with generous exemptions for entrepreneurial business activities.

This strongly hints at an increase in the rate of Capital Gains Tax (CGT) due on gains arising from non-business assets. The easiest way to do this would be to increase the rate of CGT for all assets and provide tax relief to reduce the effective rate of CGT for selected business assets, or for assets used for 'entrepreneurial activities'. This could mean increasing the scope of existing tax reliefs such as entrepreneurs' relief, or roll-over relief on business assets.

We do not expect the rate of CGT to change before 6 April 2011, however some commentators think a change could be introduced from the next Budget on 22 June. It would be very complicated for the Taxman to programme his computers to calculate CGT at two different rates for the same taxpayer within one tax year. It is also extremely unlikely that a rise in CGT would be imposed retrospectively back to 6 April 2010. Between 6 April 1988 and 5 April 2008 CGT was charged at the taxpayer’s marginal income tax rate, and this seems to be the solution the Government is leaning towards.

So what should you do before 6 April 2011 (or 22 June 2010 if ultra cautious), to avoid paying more tax? If the asset you plan to sell cannot be regarded as a business asset – for example a holiday cottage that does not qualify for furnished holiday lettings, then we should discuss the implications of making a disposal now rather than later. Remember a disposal need not be an outright sale, a transfer to a trust would give rise to CGT, but possibly also inheritance tax. If you make the disposal before 6 April 2011 rather than afterwards, the payment date for CGT is brought forward one year, and this needs to be balanced with the apparent tax saving.

It is not clear how far the 'generous exemptions’ for business activities will stretch. If you currently qualify for entrepreneurs' relief as you have been a business partner, sole trader, or shareholder and employee holding 5% or more of the voting shares, for at least a year, it is probably reasonable to assume the assets connected with your business will continue to qualify for that tax relief. If you don't fall into any of those categories, you should talk to us about the risk of increased CGT, bearing in mind the level of the expected gain.

You also need to look at your projected total income for 2011/12, and the likelihood that the gain will be covered by your annual exemption for CGT. This exemption is currently £10,100 per person for 2010/11, but this could be cut back to perhaps half that amount!

The CGT changes discussed above are currently all speculation so please talk to us if you are concerned at all. We expect some definite changes to be announced in the Budget Statement on 22 June 2010. Look out for our Budget newsletter when we will explain the Budget announcements relevant to small businesses and individuals.