Planning for the new capital gains tax regime

I have been giving some thought to the implications of the anticipated capital gains tax rise, and have come up with the following conclusions:

1. It seems likely that the rise will not occur until 6 April 2011, leaving the rest of 2010-11 to put planning in place. Neither retrospection nor a split tax year appears a realistic alternative.
2. Crystallisation of losses may be advisable to allow these to be offset against future gains.
3. Use of limited companies to hold investment assets may now be a more viable alternative. A corporation tax rate of 21% suddenly looks attractive for a higher rate taxpayer compared to a 40% capital gains tax rate 
4. Transfers of ownership between spouses / civil partners will become more important due to the link between IT & CGT rates, in order to crystallise gains in the hands of the taxpayer with the lower marginal income rax rate.
5. Where taxpayers have control over income levels (e.g. directors and shareholders of close companies) it may be possible to reduce income levels for a particular year to allow gains to be taxed at basic as opposed to higher rate.
6. Using the 2010-11 annual exemption is likely to be important, as the exemption level may fall dramatically for 2011-12 and later years.
7. It will become more important to ensure that particular assets qualify as business assets (it is assumed on the basis of government comments that some form of entrepreneurs’ relief will remain), and thus reviews of significant cash or other non-trading asset holdings will become even more important. There is an '80% trading' test for entrepreneur's relief to apply, and considerable uncertainty as to how this works in practice, at least on the part of HMRC!
8. Negligible value claims will become more important to establish on a timely basis, where assets are held which are of little or no value but have a CGT base cost.
9. Where EnterpriseManagement Incentive Schemes (EMISs) are set up, it has become more important to ensure that each EMIS holder has rights to acquire at least 5% of the company shares, so as to be eligible for entrepreneur’s relief on ultimate sale of the shares. This is one of the major attractions of tax-favoured employee share option schemes.
10. Living in rental properties as the main residence at some point in the period of ownership becomes a much more attractive proposition for CGT purposes. There are generous CGT reliefs for properties which have been the taxpayer's main residence even for a short period of time during the period of ownership.
11. Elections for main residence exemption will become more important, as will careful planning to maximise available PPR exemptions. Where a taxpayer has two or more residences at any one time, he or she can elect which should be treated as the main residence for any particular period. 
12. Investment strategies are likely to change, with life assurance bonds becoming relatively more attractive compared to equities, unit trusts etc.
13. Establishing non-UK residence for a minimum 5-year period becomes a more attractive proposition if large gains are anticipated.
14. A careful eye will need to be kept on the future treatment of furnished holiday lettings, as trading treatment for CGT is now of vital importance. Consider triggering a disposal to a settlor-interested trust to cover the possibility of the withdrawal of CGT business assets treatment?
15. Careful note will need to be taken of the share matching rules when planning disposals, with particular reference to the ‘bed and breakfasting’ rules and the possibility of a disposal by one spouse / civil partner and a re-acquisition by the other. Bed and breakfasting is selling and buying back shares over a short period (30 days for CGT purposes), but the rules in this respect can be circumvented by different spouses buying and selling the shares.

Hopefully some food for thought here, although detailed planning for specific circumstances will remain essential.

 

Mark Simpson

 

26 May 2010