Be on the CGT swings, not roundabouts

April 6 change demands planning, writes Niki Chesworth

Law of unintended consequences strikes again

www.telegraph.co.uk/tax

After recent stock market volatility, capital gains tax (CGT) is a problem many investors must wish they still had. But many medium- to long-term investors are still sitting on substantial profits.

Even after the turmoil of the past week, the FTSE 100 index closed 75 per cent higher on Tuesday than its low-point in March, 2003.

Less happily, new CGT rules will mean bigger tax bills for many investors in less than three months' time. So successful investors – along with business owners, buy-to-let investors and secondhome owners – should consider whether to sell assets now or after April 5 when the new tax regime is introduced.

A cut in the rate of CGT from a top rate of 40 per cent to 18 per cent from April 6 is good news for investors in everything from second homes to buy-to-let properties, who will mainly benefit from holding on to assets until the start of the new tax year. However, those with any form of business asset – including employees in share-as-you-earn schemes and investors in Alternative Investment Market (Aim) stocks – could face a tax rise from April 6.

This is because taper relief, which reduces the amount of tax paid the longer an asset is owned, will be scrapped. So instead of paying a low 10 per cent tax on so-called "business" assets owned for at least two years, entrepreneurs, employees and investors face an 80 per cent tax increase to 18 per cent. So they may benefit from selling assets or at least crystalising their gains, for example by passing them on to a spouse or moving them into a self-invested personal pension (Sipp) by April 5.

A word of warning: the Chancellor, Alistair Darling, has still not finalised his proposed changes – although he is expected to meet with representatives of business groups in the immediate future. This means that entrepreneurs will have to second-guess any changes if they want to act now or they may be left with little time to mitigate the impending tax increase – particularly as this may involve selling their business.

However, if business-owners try to anticipate the changes they could lose out as it has been proposed that a new retirement relief of £100,000 is introduced – exempting the first £100,000 of gains on the sale of a business by owners aged 50-plus. Fortunately, the proposals are more clear cut for investors in other forms of assets, who still have enough time to take steps to cut their tax bill – either this year or in future. So what measures can they take?

STEP 1: CALCULATE YOUR GAINS

Remember the obvious: CGT is levied on the gain not on the price an asset is sold for.

The gain is the price received less the purchase price and certain allowable costs such as share dealing charges. Gains are taxed at the individual's top rate. As they are added to other taxable income when calculating the rate payable, a basic rate income taxpayer can find that they must pay 40 per cent capital gains tax.

"List all your assets and then do a winners and losers chart as to those assets which are going to suffer more tax after the start of the new tax year and which will be taxed at a lower rate," says Leonie Kerswill a tax partner at accountants PricewaterhouseCoopers.

"If you are going to pay 40 per cent tax on gains now – for example, on the sale of shares – but only 18 per cent after April 5, then you will pay significantly less tax and you will have the added benefit of having nearly a year to pay.

"So you may decide to hold on to any shares you are planning to sell for a little longer. Although, in the meantime, the markets could move against you, so there is some risk."

Separate calculations will need to be done for assets held before April 1998 as these also benefited from indexation allowance, which strips out the effect of inflation – so investors are not taxed on gains that are purely to do with price rises. Combining indexation with taper relief – which reduces the amount of tax an asset is owned – could result in less tax being paid now, even with a higher rate of CGT.

"If, for example, you bought an asset that qualifies for indexation allowance and taper relief you may be significantly better off under the current tax regime, so it is important to capture these benefits before the end of the tax year," explained Ms Kerswill.

"Transferring assets between spouses or civil partners is the easiest way if you own something you do not want to sell – quoted shares or a second home, for example. However, if you give an asset away, you have to remember that you no longer own it. That might be a problem if the marriage ends, for example."

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