Budget Alert 2010
May 18th 2010
The uncertainty as to who will govern the country is over, with the announcement of a Conservative-Liberal Democrat coalition.
What action should taxpayers take now to try to avoid the worst of the inevitable tax rises?
Capital gains tax (CGT)
In their manifesto, the Lib-Democrats proposed to raise CGT to marginal rates, so for someone now paying 50% income tax their CGT rate would also be 50%. CGT rates are currently 18%. It appears that the compromise that has been reached is for an increase in the rate of tax on non- business assets, presumably those not qualifying for Entrepreneurs Relief. Whether the 18% rate will be preserved for business gains above the £2,000,000 threshold for that relief remains to be seen.
With reports in the press of increases in the rate of CGT to 40% or 50%, it should be remembered that in the past the rate of CGT was aligned with the top rate of income tax at 40% with only a limited ‘Retirement Relief’ available for business assets - could there be a return to this?
The Conservatives will hold a Budget on 22nd June 2010; this may be the date when any tax increases will be announced, but it may not necessarily be the date from which they will take effect.
Historically, personal tax rises have only taken effect from the start of the tax year (6 April), so any rise would be expected to take effect from 6 April 2011. However, this could be the exception that proves the rule.
It is therefore worth considering some rebasing strategies to trigger inbuilt gains before the Budget and/or the end of the tax year ending 5 April 2011. Key strategies to consider include:
Sell
Realising in built gains in investment portfolios now may ensure that they are taxed at current rates. Assets could then be re-purchased (after 30 days) if considered desirably from an investment perspective.
Uncompleted contracts
Entering into an unconditional contract for the sale of an asset provides a hedge against an increase in capital gains tax rates, with the date of exchange being treated as the date of disposal in the event of an increase in rates and the contract left uncompleted if rates stay the same.
Forward sale strategies
There are a number of effective structures using forward and option contracts, selling assets to a counterparty, thereby triggering a rebasing event. This can also allow the assets to be repurchased if wished in due course.
Transfer to a CGT wrapper
Another alternative is to transfer assets to an Open Ended Investment Company (OEIC) or Authorised Unit Trust (AUT), so triggering a gain and achieving deferral on any future gains.
Using Trusts
In some cases, transferring assets to trust can effectively rebase and offer deferral over the longer term. Conversely now may be an appropriate moment to distribute assets from trusts (particularly offshore trusts that are subject to a penalty charge that will exacerbate any increase in rates).
The key in all cases is to ensure the strategy is best matched to the assets in question, and the circumstances of the individuals concerned.
No announcements have yet been made on the future of the non-domicile remittance basis regime. In their manifesto the Lib-Democrats proposed the abolition of the remittance basis regime for those residents in the UK for more than seven years. The Conservatives had only proposed a new flat rate levy on non UK domiciliaries to pay for the increase in inheritance tax (IHT) thresholds. With the Conservatives seemingly abandoning their plans for the increase in the IHT threshold in the short term, there remains considerable uncertainty for non UK domiciliaries as to what steps the new Government will take. Assuming that the remittance basis is retained then an increase in the charge paid by long-term residents may take place.
Inheritance tax
The Conservative proposal to increase the nil rate band to £1 million appears to have been shelved. For the time being the threshold seems likely to be frozen which will only serve to increase the importance of effective lifetime planning and tax efficient wills.
