Can you beat the Budget?

Individuals and trustees may have a brief opportunity to realise latent capital gains on non-business assets now and pay tax on those gains and bank the low rate of 18%.

We can be fairly sure that bad news is on the way because, in the coalition agreement between the Conservatives and the Liberal Democrats, they have pledged to increase Capital Gains Tax (CGT) to “rates similar or close to those applied to income” (that is, 20%, 40% and 50%) although the effective CGT rate on the sale of business assets is expected to remain low, perhaps at 10% on the first �2million of lifetime gains.

It is not certain whether such a change will take effect from the date of the forthcoming “emergency” Budget, on June 22, be back-dated to April 6, 2010, or take effect from April 6, 2011. Back-dating the increase would be controversial but delaying the increase until April 2011 could prove costly for the Treasury.

I suspect the increase will take effect from Budget day so there is now a brief window of opportunity to realise latent capital gains on non-business assets that you own and pay tax on those gains (after losses and the annual exemption) at only 18%. Trusts also incur tax on capital gains made by the trustees at 18%, so trustees should actively consider if gains should be realised now to take advantage of this low rate.

It is clearly sensible to ensure that such a disposal will give rise to a taxable gain; if it does not, you may have incurred transaction costs and divested yourself of a potentially valuable asset needlessly.

There are a number of situations where an apparent sale does not actually result in a taxable disposal, for example, selling shares and then buying them back within 30 days; the two transactions are matched so the original latent gain will not become chargeable. Equally, selling an asset to your spouse or civil partner will not be effective as all such transactions are deemed to take place on a no gain-no loss basis.

If you have an asset that you wish to keep that is showing latent gains, it may be possible to dispose of it to a third party such as a relative (other than your spouse), a family company, a small self-administered pension scheme or a family trust (in which you may have an interest) in order to trigger a disposal taxed at 18%. Careful planning will be required and such arrangements are not without their commercial and tax drawbacks.

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It should be remembered that capital losses made in the same year as a gain, or brought forward from earlier years, reduce the taxable gains. Where large losses are available there is probably no need to take urgent action if these will cover gains for the foreseeable future.

There are many issues to consider before rushing in to a sale, but if you have assets showing a gain, taking advice now could save you substantial sums in the long run.