Elspeth May on CGT – Back to the drawing board.

Wide-ranging changes were announced to the UK’s Capital Gains Tax (CGT) regime in the Budget, although some of the more interesting effects may not be seen for a long while.

From an individual’s point of view, though, it will be harder to work out the CGT payable on his/her investment portfolio. New identification rules will require a rethink of portfolio management. Out goes pooling and in come new rules that sound the death knell for bed and breakfasting of shares.

Indexation will not continue after 1 April 1998 but it had been hoped this would be achieved by rebasing the value of all assets. Investors will still need to retain records of assets acquisition and indexation calculations prepared up to 31 March 1998.

Then there are the new taper calculations. Basically, the longer you own an asset the lower the amount of CGT you will pay on the eventual gain. Losses in any tax year will be set off against gains before the taper is applied. The best use of losses is yet another factor to consider.

To delay the sale of an investment could save tax but may not result in the highest gain.

Those with assets in life-interest settlements and on a 23% CGT rate may want to realise gains before the 34% CGT rate comes in on 6 April 1998.

For ongoing businesses, retirement relief will be phased out before April 1999. The new taper relief may produce a better tax result than the existing retirement relief. Succession planning will become more complex, but the anticipated adverse changes to inheritance tax weren’t announced.

The changes are welcome for entrepreneurs, but the date of disposal will be critical and the impact uncertain on the market in private companies.

Hopefully the 10% rate will extend to employee shareholders.

CGT will be harder to escape, now that existing offshore trusts are in the UK tax net and a general anti-avoidance provision promised. At least assets can still be transferred between husband and wife, and there is still CGT exemption on death; so one solution is to hold onto assets for a long time. As Franklin said, there are only two certainties: death and taxes.

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