UK Taxpayers Urged To Utilise Indexation Before CGT Flat Rate Hits

by Robert Lee, Tax-News.com,London

07 February 2008

Business and financial advisory firm, Grant Thornton, is urging taxpayers to take advantage of indexation before the UK capital gains tax flat rate drops on 6th April this year - provided they have a helpful spouse.

Introduced in 1985 to overcome high levels of inflation which were forcing individuals to pay CGT on illusory gains, indexation allows anyone offloading an asset to uplift the base cost of the asset for capital gains purposes for the impact of inflation between the time the asset was purchased (or April 1982 if earlier) and April 1998.

Mike Warburton, senior tax partner at Grant Thornton, says those wishing to minimise their exposure to the flat rate when it begins on 6 April this year should investigate indexation, as it could save some individuals substantial amounts of money.

"The current Chancellor plans to abolish Indexation along with Taper Relief on 6th April when he replaces the existing system with a flat 18% rate of CGT, but draft legislation issued in January confirms that it should be possible to retain the benefit of Indexation Relief by giving assets to your spouse," stated Warburton.

"Many people selling shares, buy to let properties, or other assets over the last ten years, have benefited from the indexation that they had earned. That benefit still exists but only for another two months," he added.

For example, someone who bought an investment property or block of shares in Summer 1982 for GBP10,000 will have a base cost with Indexation of about GBP20,000. Transferring those assets to their spouse will give that person a base cost of that GBP20,000 which will remain there after April this year when Indexation Relief is abolished.

This could typically reduce their capital gains bill on a future disposal by as much as GBP1,800. However, there is a complication, because indexation only applied from April 1982, but recent comments from HMRC seem to indicate that it will fix any problem with 1982 assets.

Warburton continued: "The draft rules created some uncertainty about whether an asset held at 1982 would qualify, however, HMRC confirmed that the intention was that those assets should qualify and will make adjustments to draft legislation if necessary."

"Particular beneficiaries of this will be farmers and land owners, but millions of others could do the same and so need to investigate this situation immediately or else face the difficulty of realising later in the year that they could have taken advantage of this relief."

Warburton concluded: "Gifts to your spouse or civil partner do not attract Stamp Duty or tax at the time, so it really is a win-win opportunity for those prepared to act quickly."

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