One of the key factors of Alistair Darling’s pre-Budget Report was the proposal to dramatically change Capital Gains Tax. The detailed rules have just been announced and it is confirmed that Taper Relief is to be abolished and the benefits of indexation are to be cancelled from 6th April 2008. A flat Capital Gains rate of 18% has been proposed from then onwards. Relief will however be available for entrepreneurs selling their businesses with the first £1,000,000 of gain being taxed at only 10%.
No changes are proposed for private residences exemptions, lettings relief, business holdover or rollover relief, and losses brought forward are still available as before.
Indexation was introduced as a way of dealing with inflation to ensure that only gains above the rate of inflation were taxed. This was available from March 1982 to April 1998. Where assets were held for the full period, an uplift of up to 105% was given, reducing the potential Capital Gains considerably. The proposal is that this is now to be wiped out.
However, there appears to be a way of retaining indexation without triggering a Capital Gains charge.
Where assets are held in one spouse’s name, then a transfer of that asset to the other spouse is deemed by the relevant legislation to be a transfer at original cost plus indexation for Capital Gains Tax purposes, with the result that the receiving spouse will have an uplifted Capital Gains cost base, but the transferring spouse will not have any Capital Gains liability on the transfer. It is unclear if this is applicable to assets which were purchased before 31st March 1982, so please contact us if relevant.
An example will illustrate the benefits.
Mr A purchased an investment property for £60,000 in April 1986. In June 2008, he sells it for £500,000. Under the new proposed rules, he would be assessed to tax on the profit of £440,000 at 18% i.e. £79,200 (ignoring the tax-free band). By transferring the property to his wife now, indexation of 66.5% could be added to the original cost meaning that the wife’s base cost for tax purposes was £99,900. Capital Gains Tax would then be reduced to £72,018.
By this relatively simple mechanism, over £7,000 has been saved (and there could be two tax free bands available also).
There should be no Stamp Duty Land Tax (SDLT) on such a transfer as it is done by way of gift. However, where a mortgage is attached to a property being transferred, then SDLT could apply to the value of the mortgage, so that care is necessary in such circumstances.
Please contact us for any further information you may require.
Lawrence Grant Kibel Limited
37 Stanmore Hill, Stanmore, Middx, HA7 3DS
020 8416 3322
The information given in this note is based on our understanding of the proposed legislation which has yet to be brought into law and which may change prior to the next Finance Act. As all cases are different, any clients should contact us before taking any steps which could affect their investments or tax position.