What is likely to happen to
Capital Gains Tax?

The outcome of the election has left many people concerned about the likely changes to Capital Gains Tax so I turned to my tax advisor, Tony Cooney, to give me his best advice on what might happen and below is what he had to say. I also asked Peter Hughes his view on Tony’s comments and he said “I hope he is right and there is some form of tapering, though the fairest system would be to reintroduce indexation, as this would mean that inflationary gains are not taxed.”

Stephen Smith, Managing Director, UK Training (Worldwide) Limited

The tax world is awash with rumours, following the Government's announcement to seek agreement on moving Capital Gains Tax (CGT) rates on non-business assets towards income tax rates with ‘generous reliefs’ for entrepreneurs. You may be aware that there is an emergency budget set for 22nd June 2010. We want to ensure that you are aware of the potential changes.

So CGT could possibly go up from 18% to a potential maximum of 50% on non-business assets. This could include rental properties, holiday homes and other investments such as shares. There is talk of the annual exemption being reduced to £5,000 or even £2,500.

The current regime for business assets such as shares in a trading company is that the first £2m lifetime gain is taxed at 10%, with the balance at 18%. The big question is what will happen here? Remember that in the past there has been Retirement Relief and Business Asset Taper Relief. Could there, again, be something completely new?

The question for you, if you are potentially affected, is whether you consider some form of disposal or crystallisation to secure current rates before the budget date. Crystallising is dangerous where there is not an imminent sale as there is a tax liability and no cash from the asset. You could also think that ‘generous reliefs’ may justify doing nothing with business assets on the basis that the new system won’t be any less favourable than the current one.

One commentator has said that the tax could even be backdated to 6th April 2010 to counteract the effects of crystallisation. That would make crystallisation disastrous. Others have suggested that the changes would come in on 6th April 2011 rather than on the budget date. Backdating seems remote albeit we are in unprecedented times. The problem of course is that everything at the moment is conjecture.

I expect that the intention will be not to scupper entrepreneurs or long term investors, but target those who hold assets for a short time and sell at 18%. My instinct is that there will be a maximum rate of 50% for non-business assets held for less than, say, 2 years with a tapering scale. This will mean that assets held for the longer term will not attract much higher rates than now - or perhaps even lower rates.

I, and my colleagues at Ashworth Treasure, will be keeping a close eye on events as they unfold. Please feel free to contact me if you have any concerns.

Contact Ashworth Treasure