CGT losers! - OUT OF DATE 6 APRIL 2008

When it was announced last October the complex CGT system would be swept away and replaced with one flat rate of 18%, many taxpayers with non-business assets, second homes, buy-to-lets and shares listed on the main market, were assumed to be winners. However, it can very much depend on how long an asset has been held, and whether the taxpayer will be a higher rate taxpayer at point of disposal.

In fact some long-term investors will be substantially worse off because indexation allowance is being abolished. Read on for further information.

Investors with assets purchased before 1998 benefit from indexation allowance, which took account of high inflation.

Someone who bought an investment in the summer of 1982 could knock an extra 105% off the gain they have made. Suppose he or she bought the assets for £50,000 in 1982 and sold them today for £200,000. The first £102,000 of profits would be tax free, reducing the taxable gain from £150,000 to £98,000.

Using the worse case of a higher-rate taxpayer, relief would allow only  24% on the £98,000 gain to be taxed, or £23,520 if he or she sold before April 5, ignoring annual allowances, which could further reduce the tax bill, and ignoring any transfer between spouses which may benefit as well.

Now look at the new position after 5^th April and you would see the tax bill rise to £27,000 as indexation and taper relief are removed and replaced by a flat 18% tax rate on the full £150,000 gain.

Who will lose out after the capital gains tax revamp? Investors with AIM stocks and about 270,000 people in save-as-you-earn employee-share schemes. These are classed as business assets, so top-rate taxpayers paid only 10% once they had owned the shares for two years, while basic-rate taxpayers paid 5%. From April everyone will pay 18%. The new rules do not affect investors with share-incentive plans.  Long-term investors with assets purchased before 1998 could lose out due to the abolition of indexation allowance.

How did indexation allowance work? It removes some or all of the taxable gain on assets held between April 1, 1982, and March 31, 1998. You work it out by multiplying the amount you spent by the indexation factor on the Revenue’s website (hmrc.gov.uk ) under “Rates and Allowances – Capital Gains”.

With taper relief, which applies to all gains made since April 1998, the longer you hold an asset, the lower the rate of CGT you have to pay. This is removed from 6^th April 2008.

After three years of holding a nonbusiness asset you pay CGT on 95% of the gain; after a decade you pay tax on 60%. For example, a higher-rate taxpayer who sold a basket of shares after less than three years would pay 40% tax. After four years, the tax rate would drop to 38% and after 10 years to 24%. If you sold up on or before April 5 you can claim both sets of allowances if you have held an asset for 10 years or more.

Is it easy? It is too late to avoid this change if you are reading this after 5th April 2008, but you are still able to transfer assets between spouses, which can still be an advantage ensuring both parties utilise their tax free allowance. If you are transferring shares, investment funds or savings accounts ask your broker, investment manager or bank to move the funds into your spouse’s name. With property you can sign a declaration of trust, which spells out the proportion of the property a husband and wife own.

This should not be deemed as individual advice and you should seek further information particular to your individual circumstances. For further information, contact AisaProfessional on (01672) 569111.