Following the changes to the Capital Gains Tax (CGT) regime announced in the Pre-Budget Report, much opposition to the proposed abolition of taper relief has been voiced by industry bodies such as the Confederation of British Industry, the Institute of Directors and the Federation of Small Businesses. The effective rate of CGT is currently determined by the taper relief rules, which differ according to whether the disposal is of a business or non-business asset.
Currently, in general terms, the effective rate of CGT on the disposal of business assets decreases from 40% to 10% after two years, and decreases from 40% to 24% after 10 years of ownership for non-business assets. From 6 April 2008, a flat rate of CGT of 18% will apply on the disposal of all assets, irrespective of the length of ownership.
There will be some winners and some losers, depending on the type of asset(s) you own, your plans for that asset(s) in the future, the cost history of the asset and the effect of other changes announced such as the withdrawal of indexation allowance.
Based on the changes announced, and the information we have so far, the table below summarises a number of potential courses of action which should be considered now. These options will be developed when we receive more details of the proposed changes: the draft legislation has yet to be published. There have been, as you will have noticed, many calls for the Chancellor to rethink his plans for the abolition of taper relief and other measures announced. It is possible that he will heed these calls, and indeed that there may be transitional arrangements announced. We will update you when we know more.
Tax is always an important consideration, but the decision of how and when to dispose of assets (particularly business assets) should always be based on commercial considerations.
It is essential that you seek professional advice on the options open to you, based on your particular circumstances, before taking any action. Please contact us if you wish to discuss this in further detail.
Business Assets eg:
- Shares in a business or an unquoted trading company
- Shares in AIM-quoted trading companies
- Furnished holiday lets; and
- Employee shareholdings in employing company
1. Sale of asset imminent: negotiating now
Possible Action:
- Sell by 5 April 2008 to take advantage of effective 10% CGT rate.
Issues to consider:
- Tax payable by 31 January 2009
- Avoid receiving payment in loan notes (see below)
2. Sale of asset likely in near future, but unlikely to complete by 5 April 2008
Possible action:
- Consider triggering capital gain now, to take advantage of effective 10% CGT rate eg. by selling to a trust and
- Set up trust, ready to buy before 5 April 2008
- Continue to try to sell to third party purchaser before 5 April 2008, failing which sell to trust, leaving the consideration outstanding on loan account
- Asset can then be sold by trust, repaying loan, and holding a small profit
Issues to consider:
- May need to borrow to pay tax if sale to third party not complete by 31 January 2009
- Possible Inheritance Tax (IHT) exit charge on the trust when it distributes cash after sale of the asset
- 10 year charge on the trust (if trust continues)
- Valuation of the asset
- Debt due from the trust does not qualify for Business Property Relief
3. No current intention of selling but sale in a few years or more
Possible action:
- Possibly consider a sale to a trust (as above). Also consider IHT
Non-business assets eg:
- Second homes
- Investment properties
- Other capital assets: paintings, jewellery etc
- Buy-to-let properties
1. Thinking of selling soon
Possible action:
- Delay sale until 5 April 2008 to take advantage of 18% rate
- Contact us to discuss the options available if sale cannot be delayed until after 5 April 2008
Issues to consider:
- Tax payable 31 January 2010
2. No current intention of selling
- None for CGT but consider IHT
Qualifying Corporate Bonds
Where an individual has deferred a gain into a qualifying corporate bond (QCB) (ie the gain is deferred until the disposal of the QCB), the position from 6 April 2008 is unclear, but we understand that the disposal of a QCB from that date will be taxed at 18% on the original, “un-tapered” gain. Holders of QCBs should perhaps consider making a disposal before 5 April 2008, but must bear in mind that the draft legislation is yet to be published.
Earn-outs
It has often been sensible to incorporate an earn-out in a loan note (a non-QCB) so that the extra sales proceeds would not be taxed until received and should continue to qualify for the same BATR as the original disposal.
For disposals of businesses before 5 April 2008, with an earn-out payable after that date, it is likely to be more efficient to accept the “Marren v Ingles treatment”. This would mean that the estimated value of the earn-out is taxed immediately (before 5 April 2008) at 10% and any further amount payable above the estimate would be taxed at 18% (from 6 April 2008). It will therefore probably be beneficial to argue for the highest possible estimate of value upfront, even though the tax will be payable at an earlier date. If the actual amounts received prove to be less than the estimate, the CGT liability can be recalculated and tax repaid.
Stockpiled Gains
It would appear that recipients of capital payments under the offshore trust regime (stockpiled gains) will pay CGT at an effective rate of 28.8% from 6 April 2008 (currently 64%), and may therefore wish to consider returning assets to the UK. The new rules have not been published so there may be other relevant features.
If you need further information, please contact Brian Williams.