Capital gains tax planning for the emergency budget

By: Justin Randall - Accountant London

Date: 18 June 2010

Although capital gains tax (CGT) is set to rise, we do not know when. The start date may be deferred to 6 April 2011, but the changes could also take effect from 22 June this year.

Property owners and investors can expect to bear the brunt of the increases. Trading businesses and shares in trading companies may continue to benefit from Entrepreneur’s relief, although that relief is fairly restricted compared to the old “taper” relief it replaced.

While it may be possible to sell assets by the end of the tax year, it might not be feasible to sell to a third party by 22 June. For this reason, it could be worth locking in the gain at the current 18 per cent using a family trust.

CGT on trust transfer

A transfer into most types of trust is treated as made at market value for CGT purposes. It should therefore crystallize CGT at the current rate on the accrued gain to date. Similarly, the trustees will be deemed to have acquired the asset at current market value, which is then their base cost used for a future sale taxed at the new higher rates.

There is, of course, a risk that if values fall, the trustees actually make a loss that cannot be offset against their gain going into the trust. However, this may be outweighed by the tax rate saving achieved.

The tax on the trust transfer will fall due on 31/1/2012, by which time the asset may have been sold to a third party. Alternatively, there may be scope to pay the tax in installments.

Stamp taxes

A gift of property into trust should not attract Stamp Duty Land Tax (SDLT), although SDLT would arise on any transfer of mortgage to the trustees (this representing consideration). Similarly, there should be no stamp duty on a gift of shares into trust. Stamp taxes will be incurred where there is actual consideration.

Inheritance tax

It is important to note that for inheritance tax purposes, gifts to trust are generally taxable at a 20 per cent lifetime rate once the nil rate band (£325,000) has been exceeded. The tax does not need to be incurred on larger transfers, but the process needs to be carefully managed.

Avoiding unnecessary CGT

Obviously there is a concern that if the asset is not eventually sold to a third party, a CGT liability has been triggered unnecessarily. There are strategies to mitigate the CGT charge on a transfer, if the asset is to be retained.

Those with property or shares likely to be sold in the not too distant future should think carefully about a transfer before 22 June. The position is uncertain, but if the CGT rate goes up to 40 per cent or even 50 per cent, individuals are going to lose a substantial part of their capital appreciation. This, in my view, is akin to retrospective tax.

The points raised above are only intended to provide general information. Professional advice should always be sought in specific situations before taking any action.

Justin is a partner at London-based chartered accountants and tax advisers Jeffreys Henry LLP.

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