CAPITAL GAINS TAX - YEAR-END PLANNING - 19.01.2011

Avoiding a potential CGT hike

The 2011 Budget is just weeks away and there’s speculation that another increase in Capital Gains Tax (CGT) is on the cards. With this in mind and the stockmarket on the rise when is the right time to cash in on gains?

Up and down rates

CGT rates seem to have been the play thing of successive Chancellors over the last decade, with effective tax rates ranging from 10% to 40% and just about every point in between. And, in case you’ve forgotten, we have two main CGT rates applying in the current tax year alone. Some experts have suggested that because the coalition government still needs to find billions to fill the black hole in the country’s finances, CGT makes a soft target and so we could see a further rise in rates in this year’s Budget.

Predictions

If the Chancellor were to increase CGT rates, the smart money is on him to bring them into line with the rate of income tax which the individual pays, i.e., 20%, 40% or 50%. We’re happy to stick our neck out and say that there’s no likelihood of him doing away with the 10% rate for entrepreneurial capital gains (see The next step). The next question to ask is, if CGT rates were increased, would Mr Osborne apply the new rates with effect from Budget day or not until the beginning of the 2011/12 tax year (April 6 2011)? We wouldn’t like to bet on this either way, so our advice is don’t take the chance.

Tip. The key date for end of year tax planning has always been April 5, but the Chancellor has shown he’s not afraid of taking the unusual step of changing the CGT rate part of the way through the tax year. Therefore, as we already know that this year’s Budget will be on March 23, we suggest completing any share deals before that date to avoid being caught out by any Budget day changes to the rates, exemptions or allowances.

When’s a share deal a deal for CGT?

Keep in mind that for CGT purposes a deal is treated as taking place on the date you agree to sell or transfer an asset, e.g. when a stockbroker sells shares for you; it’s the day of the deal that counts, not the day you get paid by the purchaser.

Plan of action

Despite some changes to the CGT rules in last year’s Emergency Budget, the year-end tax planning strategies remain the same. Here’s a few of our top tips to save CGT on shares.

Tip 1. Where you own shares which are worth more now than when you bought them, don’t let your annual CGT exemption, currently £10,100, go to waste. Sell enough shares to use this. If you don’t, this year’s annual exemption will be lost forever. Use our simple calculator to help you work out how many shares to sell (see The next step).

Tip 2. If you want to keep the shares but use your annual exemption, you can buy them back. But wait 30 days before you do, otherwise anti-avoidance rules can effectively cancel the tax advantage you achieved by selling the shares.

Tip 3. If your spouse isn’t using their annual exemption, transfer shares to them to sell. They are treated as paying the same amount as the shares cost you. This means the transfer is CGT neutral for you, and when they sell them they can use their annual exemption against any gains.

For details of current CGT rates (TX 11.08.06A) and to access our calculator (TX 11.08.06B), visit http://tax.indicator.co.uk.
To avoid any Budget day changes in CGT rates or exemptions, sell shares before March 23. Aim to use up your annual CGT exemption, £10,100 for 2010/11, by selling shares that are worth more than they cost. Transfer shares to your spouse so that he or she can use their CGT exemption too.

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