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  1. Wealth
May 19, 2010

Kleinwort Benson on CGT

By Spear's

London 19th May 2010: The Capital Gains Tax (CGT) rate for ‘non-business’ assets – which include amongst other assets, collective investments, second properties and shares – is widely expected to be targeted in the Emergency Budget on 22nd June.

London 19th May 2010: The Capital Gains Tax (CGT) rate for ‘non-business’ assets – which include amongst other assets, collective investments, second properties and shares – is widely expected to be targeted in the Emergency Budget on 22nd June. It is thought that CGT will rise from 18% to 20%, 40%…. even 50% to move in line with Income Tax rates.

Given the extent of the UK’s budget deficit the current rate of CGT is probably the lowest it will be for a very long time, certainly in the era of the Lib-Con coalition Parliament. Therefore, by taking action now to realise capital gains, one is highly likely to avoid incurring higher charges in future years.

Here we see how CGT and Income Tax rates have moved over the last 40 years.

When will CGT rates go up?

The timing of this proposed change is the subject of much speculation.  Whilst it is unlikely to apply retrospectively from 6th April 2010, this is not beyond the parameters of possibility.  

Alternatively, and slightly more likely than retrospective taxation, is the prospect of immediate change to the CGT rate – to take effect from the date of the Emergency Budget.  However, CGT is an annual tax running from the 6th April to the 5th April each year and there are no precedents for changing rates or allowances part way through the year.

One of the most likely scenarios could be an increase in the CGT rate effective from April 2011. However, there could be a risk of ‘anti-forestalling’ legislation ahead of 6th April 2011 – similar to those affecting individuals making pension contributions, whereby the Government introduce tax charges on those seeking to circumvent the rules before they become law – and this could apply to gains made on or after 22nd June 2010.

Whatever the timing of the CGT rise it is important for those that might be affected to consider their options now, not in the wake of the Emergency Budget.

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Rebasing assets

It may be possible to accelerate the sale of a capital asset or take steps to rebase assets to trigger unrealised gains, to take advantage of the current 18% rate of CGT.  However, whether or not this is possible and how it should be done will depend on the asset in question and an individual’s own personal circumstances.  There are a number of options clients may wish to consider when crystallising capital gains:

1. Sell the assets now and crystallise in-built gains.  Subject to the possibility of retrospective taxation this action would ensure that assets are taxed at the current rate of 18%.  It is possible to re-enter the market after the 30 days required by the ‘anti bed and breakfast rules’.  However, this would mean being out of the market for at least 30 days.

2. Reorganize the holding of investments within a family.  Sell the asset and crystallise the gain at 18% and then re-purchase assets immediately in the name of a spouse, civil partner or adult children.  It is important that this is done on a ‘no-strings’ attached, arms-length basis.  Given recent volatility in the markets, this strategy would allow the family to retain existing holdings without leaving the market.

3. Transfer shares into a Self Invested Personal Pension (SIPP).  There are two options:a) transfer the shares in specie or b) make a contribution (subject to earnings) to the SIPP, which can then purchase the assets from the holder of the assets.

Both options will trigger a capital disposal but any future gains will be protected from tax.  Furthermore, the SIPP can continue to own the securities.  One may also be entitled to claim income tax relief on the pension contribution.

4. If the asset is a collective investment then it can be transferred to an offshore bond. This would rebase the cost of the asset and allow gross roll-up within the bond, thus deferring any future gains.  With careful planning the bond can be surrendered at a time when the person is a lower rate or nil rate taxpayer.

5. Transferassets to a collective investment scheme, such as an Authorised Unit Trust (AUT) or Open Ended Investment Company (OEIC).  The transfer of the assets would trigger a CGT disposal.  Assets held by the AUT or OEIC are protected from CGT within the wrapper, resulting in the deferral of any future gains.

6. Transfer the asset to a settlor interested trust.  Transferring assets into a trust will give rise to a chargeable disposal.  The trust can be drawn up to allow the settlor and their spouse to benefit, which should provide access to capital and income of the trust’s assets.  There may, however, be other compliance costs of holding the assets in trust.

7. Sell the asset and buy a call option with a right to buy the asset sold at a predetermined price, after 30 days.  This would be a sensible option if the price of the shares rose in the intervening period or waive the right if the price went down.

There is no standard solution, and it is clear that any recommendation will depend on individual circumstances.

For media enquiries or to speak with the acclaimed Kleinwort Benson tax team, please contact:

Kleinwort Benson                 
Rachel Butler             
+44 (0) 20 3207 7239
+44 (0) 7957 427 066

Phoenix Financial PR              
Gordon Puckey          
+44 (0) 20 7947 2856
+44 (0) 7799 767 468

Karin Tyche                
+44 (0) 20 7947 2858
+44 (0) 7775 698 172

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