Act now to avoid 50% CGT rate
Investors should act now to avoid being hit by a hike in capital gains tax (CGT) to as much as 50% warn experts.
The government confirmed a rise in CGT from the current flat rate of 18% up to as much as 50% for higher-rate tax payers.
The coalition says it believes the tax system needs reforming to make it more “competitive, simpler, greener and fairer”.
A key element of this will be the planned increase of CGT on “non-business assets”, including second homes, buy-to-let properties and shares.
Tax experts are still unsure as to when the hike will be introduced, but some predict it could be as early as the emergency Budget on 22 June.
The coalition agreement states: “We will seek ways of taxing non-business capital gains at rates similar or close to those applied to income, with generous exemptions for entrepreneurial business activities.”
This could mean a rise from the current 18% flat rate to a top rate of 40-50% for higher-rate taxpayers – basic rate taxpayers would pay 20%.
The move could double tax bills for hundreds of thousands of investors, and if the Liberal Democrats get their way, CGT could kick in at a lower threshold than its current level.
At the moment, the threshold for CGT is set at £10,100 profit on any investment income, but the Lib Dems have suggested a threshold of £2,000.
David Kilshaw, head of private client advisory at accountancy firm KPMG, says: “The timing as to when these changes will take effect is critical and prompt advice should be taken to ensure that informed decisions are made now.
“Although we believe it would be unfair for the proposed changes to CGT to be retrospective, this cannot be ruled out. But it is more likely the changes will take effect either on 22 June or at the start of the next tax year on 6 April 2011.”
Kilshaw says investors hoping to avert the rise by “banking” the current 18% rate of CGT before it rises have a couple of options open to them.
One is to sell the asset on, however, this may not be favourable in the current economic climate, with house prices and shares potentially valued lower than when they were initially bought.
Another is to shift assets to a family member in the basic-rate tax band or into a family trust.
Louise Somerset, tax director from RBC Wealth Management, says: “These ideas have downsides as well as advantages. It’s great to lock in an 18% tax rate, but doing so by selling an asset can mean creating a tax charge where none existed before.
“You should always take professional advice in these circumstances, to make sure you understand all the implications. Above all it’s never a good idea to let the tax tail wag the commercial dog.”
Chancellor George Osborne has insisted the CGT rise is necessary to crack down on income tax avoidance through income shifting, a practice he says is rife at the moment.
Capital gains tax
If you buy an asset – shares, a second home, arts and antiques – and then sell it at a later date and make a profit, that profit could be subject to CGT. You don’t pay CGT on selling your main home (which is why MPs “flipped” theirs so regularly) or any securities sheltered in an ISA. Individuals get an annual CGT allowance (£10,600 in 2010/2011) but if you have substantial assets it’s worth paying an accountant to sort it for you.
The catch-all term applied to investors who buy properties with the sole intention of letting them to tenants rather than living in them themselves, with the proceeds from the let usually used for the repayment of the mortgage. Buy-to-let investors have to take out specialised mortgages that carry higher interest rates and require a much bigger deposit than a standard mortgage. Other expenditure can include legal fees, income tax (on the rental profits you make), capital gains tax (if you sell the property) and “void” periods when the property is unlet.