Investors Braced For UK Capital Gains Tax Hike

by Robert Lee, Tax-News.com, London

20 May 2010

The Lib-Con Coalition covernment has announced that there will be an increase in capital gains tax (CGT) that will hit buy-to-let investors and individual shareholders. The measure, announced by Chancellor George Osborne in a speech to the Confederation of Business Industry, will be formally announced as part of the emergency budget, details of which will be made public on June 22.

The tax, which is currently levied at 18%, will be increased to fall in line with income tax rates and may well be hiked to 40% or even 50% for high earners. The increase will not apply to gains on business assets, including the sale of personal company shares, but this means that the many people in the UK who either own a second home or a buy-to-let investment property will be hit by the increase in tax. The proposed increase will also affect those who hold shares as CGT is payable on the profit made when shares are sold.

It seems likely that the increase will be effective as from tax year 2011/12 but no statement has yet been issued about the annual personal exemption amount – currently, every individual is allowed a capital gain of GBP10,100 in each tax year before CGT kicks in.

Louise Somerset, Tax Director at RBC Wealth Management, warns investors that they may have just four weeks to rearrange their affairs to mitigate the impact of the tax rise.

“Most of the changes to the personal tax system are likely to take effect from next April, but there is one area where we know that change is coming: the new government intends to increase capital gains tax rates to bring them more into line with income tax. For many people this means that the tax due on the sale or gift of assets may more than double. It is possible that the new rate will take effect immediately,” she observed.

RBC gives the following advice to investors:

• There is no guarantee that the relief for the sale of business assets will be as generous after the budget as it is currently. People should consider crystallising capital gains on business assets before the Budget in order to guarantee a 10% effective tax rate on the first GBP2m of gains they make, for example by selling shares to a family trust.
• Similar planning can be used for property. Consider locking in the 18% CGT rate for buy to let properties by selling them to a family member or trust before the budget, because it is very likely that tax rates on investment properties will be much higher later on
• If you have other investments standing at a gain, consider selling them now in order to pay tax at 18%. For quoted shares, it is worth considering "bed and breakfasting" shares by selling them now and buying them back after 30 days, if you want to benefit from the 18% tax rate but don't want to sell the investment.
• If you have assets standing at a loss it may be a good idea to delay selling them until after the budget, to make sure that they can be set against capital gains taxable at the new, higher, rates. If you are considering making disposals you should talk to a tax advisor to make sure that you do not lose out on tax relief through poor timing.
• If you have a trust with "stockpiled" capital gains, you should contact your tax advisor. Now may be a good time to take a distribution from a trust in order to make sure that you only pay tax at a maximum rate of 28.8%. Previous tax rates of up to 64% applied until 2008, and these or similar charges could make a comeback in the budget.

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