Although capital gains tax (CGT) is set to rise, we do not know when.
The start date may be deferred to 6 April 2011, but the changes could
also take effect from 22 June this year.
Property owners and investors can expect to bear the brunt of the
increases. Trading businesses and shares in trading companies may
continue to benefit from Entrepreneur’s relief, although that relief is
fairly restricted compared to the old “taper” relief it replaced.
While it may be possible to sell assets by the end of the tax year,
it might not be feasible to sell to a third party by 22 June. For this
reason, it could be worth locking in the gain at the current 18 per cent
using a family trust.
CGT on trust transfer
A transfer into most types of trust is treated as made at market
value for CGT purposes. It should therefore crystallize CGT at the
current rate on the accrued gain to date. Similarly, the trustees will
be deemed to have acquired the asset at current market value, which is
then their base cost used for a future sale taxed at the new higher
rates.
There is, of course, a risk that if values fall, the trustees
actually make a loss that cannot be offset against their gain going into
the trust. However, this may be outweighed by the tax rate saving
achieved.
The tax on the trust transfer will fall due on 31/1/2012, by which
time the asset may have been sold to a third party. Alternatively, there
may be scope to pay the tax in installments.
Stamp taxes
A gift of property into trust should not attract Stamp Duty Land Tax
(SDLT), although SDLT would arise on any transfer of mortgage to the
trustees (this representing consideration). Similarly, there should be
no stamp duty on a gift of shares into trust. Stamp taxes will be
incurred where there is actual consideration.
Inheritance tax
It is important to note that for inheritance tax purposes, gifts to
trust are generally taxable at a 20 per cent lifetime rate once the nil
rate band (£325,000) has been exceeded. The tax does not need to be
incurred on larger transfers, but the process needs to be carefully
managed.
Avoiding unnecessary CGT
Obviously there is a concern that if the asset is not eventually sold
to a third party, a CGT liability has been triggered unnecessarily.
There are strategies to mitigate the CGT charge on a transfer, if the
asset is to be retained.
Those with property or shares likely to be sold in the not too
distant future should think carefully about a transfer before 22 June.
The position is uncertain, but if the CGT rate goes up to 40 per cent or
even 50 per cent, individuals are going to lose a substantial part of
their capital appreciation. This, in my view, is akin to retrospective
tax.
The points raised above are only intended to provide general
information. Professional advice should always be sought in specific
situations before taking any action.
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