Alastair Darling this week sparked a final rush to beat the April 5 deadline before the new capital gains tax regime takes effect, having confirmed in his Budget that there would no further concessions.
The £1m entrepreneurs’ relief designed to placate small business owners will be made available, the chancellor said, but otherwise the much-criticised switch to a flat 18 per cent rate on all capital gains will be implemented from next month.
This leaves just three weeks for individuals to take advantage of current reliefs.
“Many people have been exploring ideas but putting off specific action [until after the Budget],” said Phillip Wood, wealth advisory director at accountants PricewaterhouseCoopers.
Director shareholders who face a headline 80 per cent rise in their CGT rate are among those now rushing to sell holdings.
Experts point out that with most private investors currently subject to CGT rates of 24 to 40 per cent, the move to 18 per cent is generally good news.
“For the normal investor, this is a rate cut as well as a simpler system,” says Leonie Kerswill, partner at accountants PwC.
But Aim shareholders, employees with Saye shareholdings, and some owners of rented-out holiday homes – “furnished holiday lets” in tax terms – are among the potential losers who, according to experts, should consider action before April 5.
Under existing rules for business assets, they can take advantage of an effective CGT rate of just 10 per cent when they sell, but this is scrapped next month.
Some long-term investors subject to higher CGT rates could also be out of pocket, particularly those set to lose “indexation allowance”, which reduces taxable gains on holdings bought more than 10 years ago. They may currently face a lower tax bill than they would under the 18 per cent rate, says Mike Warburton, senior tax partner at Grant Thornton.
For any holding showing a potentially taxable gain, Kerswill advises calculating bills under the existing and new CGT rules to decide when to sell.
But investors also need to consider market conditions. Given volatile stock markets, shareholders may face a dilemma of “do I sell now at a lower tax rate but with lower profits or do I wait,” says Wood.
With property, even if a sale is possible in the next three weeks, owners should watch out for buyers trying to force price cuts at the last minute. This “gazundering” tends to happen in difficult property markets, says Wood, making for a potential “double whammy” for tax-driven sellers.
But it is also possible to tap into current CGT reliefs without an outright sale, say experts. Warburton says transferring long-held assets to a spouse or civil partner allows investors to lock in accumulated indexation allowance. The allowance can then be used with the 18 per cent rate to reduce a future CGT bill.
He says that on a holiday home bought for £30,000 in 1982 and now worth £150,000, a “spousal gift” could save about £5,000 in tax if sold after April. “Everyone with indexation allowance [on a holding] should consider this [gifting],” he says.
By contrast a “bed and spouse” involves switching a holding of, for example, shares into a spouse’s name through a formal sale and buyback. This could make sense for using up the annual tax-free CGT allowance, currently £9,200. A similar “bed and pension” also gives upfront income tax relief.
Warburton adds that with accumulated capital gains wiped away at death, a “do nothing” approach to CGT-threatened holdings can also be a “highly effective, if extreme form of planning”.
