CGT planning before the George Osborne Budget
George Osborne the new Chancellor makes his first Budget Speech on Tuesday 22 June 2010. This is the emergency Budget needed to try and get the country back on a firm financial and economic footing.
Much of what he will announce may have immediate effect – such as changes to VAT. Some changes may not take effect until April 2011.
Potentially the most significant change will be to CGT - Capital Gains Tax. Chances are the changes will start with the new tax year on 6 April 2011.
The CGT exemption, currently £10,100 could come down dramatically – even to as low as £2,500. Also the CGT rate is certainly going to rise from 18% - quite possibly to 40%. In the old days when we last had 40% CGT there were tax reliefs to reduce the impact of inflation. Unless the Chancellor brings these, or similar, reliefs back then a lot of people will pay a lot more CGT.
The Chancellor will be aware that CGT is a tax which can often be reduced or eliminated by careful advance planning. He may therefore do one of three things:
1. Announce a change with immediate effect from 22 June 2010.
2. Announce a change with no effect prior to 6 April 2011.
3. Announce a change from 6 April 2011 but restrict how people can act between June 22 and then.
This last scenario is I suppose the scariest. The Treasury could be wary of people making dramatic changes in assets, property ownership shareholdings etc in the 9 months left of this year. Rules could be put in place to limit what people do after the Budget but before the new tax year.
For this reason I suggest people consider some CGT planning before the Budget on 22 June. A few relatively simple steps can save a lot of tax. We can be fairly confident, but not certain, that any sales or transfers before 22 June 2010 will be taxed under the old rules and with the old CGT exemption which keeps gains under £10,100 out of tax.
So what can you do before 22 June 2010?
Shares sitting at a profit – if your shareholding is sitting at a much higher value that it cost you then action now could be worth it. You can sell, produce the gains and hope to benefit from the £10,100 exemption. If you prefer to retain the shares in the household your spouse or partner could buy the same number of shares on the same day. You will have uplifted the cost of the shares to market value, paid perhaps no CGT and all at the dealing costs of a share sale and purchase. Probably well under £100 if you do it online.
In the above scenario if you live alone, or don’t want to involve a spouse or partner, you can buy back the shares yourself – but you must wait 31 days.
Shares sitting at a loss. If you don’t anticipate selling anything else this year, then selling these shares could generate a capital loss. You can buy a similar number of shares back after 31 days, or a spouse immediately, if you prefer to hang onto the shares in the hope the price goes back up. Why would you want a capital loss? By making a loss in 2010/11 this can be carried forward until some year when you face a CGT bill. The loss then comes off the gains and saves you tax. This loss can be carried forward for as long as you live – only used when your gains exceed the annual CGT exemption.
This whole share sale thing, with optional repurchase, is a valuable piece of tax planning for anyone with shares worth thousands of pounds – in any tax year. By keeping gains under the annual exemption you are updating the base cost of the shares your family owns to market value. The only cost is a modest dealing charge. This process then reduces the chance of ever having to pay CGT in the future – especially helpful if the annual exempt amount drops.
Property transfers - are another area for planning before 22 June 2010. Caution is needed here and specialist tax advice is well worth paying for. Many solicitors are not at their strongest when talking about tax. Indeed many regular accountants have gaps in their knowledge of CGT, Inheritance Tax etc.
If you hold an investment property or holiday home in one name it might be worth transferring into joint names with your spouse. There is no CGT on such a transfer and on sale you would then have two annual exemptions to reduce the tax. Be warned that CGT might be linked to income again in future so transferring to a higher-rate taxpayer could be a gamble.
Be careful about transferring property into adult children’s names. Such a transfer is taxed as if you sold the property at full market value. This could land you with a tax bill despite asking for no money from the children.
Genuine property sales are unlikely to be something you can squeeze in before the Budget, unless the sale is already agreed. If so, and the sale is not of your main home, ensuring it goes though before 22 June might be wise.
Without a crystal ball I cannot be sure what tax changes will be announced and when they will kick in. The purpose of this article is to suggest things to do before the Budget, in case immediate changes are announced.
Adrian Huston, a former tax inspector, is a director of Belfast tax and accountancy firm Huston & Co – www.huston.tv