A Capital Problem!

The one pressing question we are now being asked is “What should I do about Capital Gains Tax (CGT) in anticipation of the rates rising in the Coalition Governments emergency Budget on 22^nd June?” This is a very frustrating question, as there are so many possible outcomes in the Budget that we are dealing with total uncertainty here, apart from the general expectation that rates are going up, with no chance of them coming down. As Liam Byrne, the ex-Chief Secretary to the Treasury, intimated so eloquently, there is no money left in the pot!

If we assume CGT rates will rise, then the date the rise becomes effective is likely to be a choice of 3. Firstly, it could be back-dated to 6^th April 2010. This would be extremely rare, and hugely unfair, as transactions will have been completed based on one rate of tax, and yet fall to be taxed at another (higher) rate of tax.

Secondly, the chosen effective date could be 22^nd or 23^rd June. This is a possibility, and wouldn’t allow much time for pre-Budget tax planning. If this is the chosen date, there could be a sudden “drying-up” of sales after the Budget, so the CGT take could fall overall.

A third option is to make the change effective from 6^th April 2011. This gives people time to weigh up their options, and could lead to a large CGT take as people bring forward sales, or make sales they would not otherwise have made, in the run-up to the new CGT regime.

I am afraid my crystal ball is no better than anyone else’s, but perhaps there are some general rules which could be relevant. If you are thinking of selling an asset in the next two or three years on which you will make a gain, try to do so before Budget Day. If this is a property asset, it may prove difficult to get to unconditional contract stage, although there are some schemes being marketed which suggest this might be possible. These may be costly, so investigate thoroughly before committing.

If you have other non-business assets pregnant with gains which you don’t propose selling immediately, hold on and you may be pleasantly surprised. There may be sufficient lobbying to make sure that longer term gains are not taxed as heavily as short-term ones. The previous systems of Taper Relief or Indexation Allowances may even be brought back!

As for business assets, if there is a fear that CGT will increase markedly, it might be worth considering putting assets into a company, which could crystallise a CGT liability, albeit at today’s current rate of 10% effectively, after Entrepreneurs Relief.

The biggest surprise will be if the rates and system of CGT don’t change. There is not long to wait before we find out, but no doubt the frenzied speculation will continue apace. If and when there are any new developments, I will write again.