CGT - How long before rates increase?

There is speculation about whether capital gains tax rates will increase in the near future and new rates of 25% and even 30% have been suggested as a possibility. The headline rate is currently 18%; however, this is reduced to 10% by what is known as ‘entrepreneurs’ relief’ – which applies to the first £1 million of gains on the disposal of a business or trading company.

With the highest income tax rate increasing to 50% from April 2010, the 40% differential between income tax and capital gains tax is huge and we have seen a growing number of clients looking to take advantage of this low rate. One such method has been to incorporate a sole trader or partnership business which involves the sale of the goodwill to a new limited company. After payment of corporation tax on profits of between 21% and 28% the overall rate is reduced from a potential 52% to between 29% and 35%. Other methods have involved the disposal of shares to other family members, but this does not work if the disposal is to a spouse or minor child. Another method has been to place the company into a solvent liquidation to realise a capital distribution of the retained reserves, as opposed to an income dividend – see Diane’s article on page 8. If a capital transaction is not possible then consideration should be given to bringing forward dividends or salary into the current tax year, taxable at 40%, and deferring qualifying expenditure into the following tax year where relief may be available at 50%. It is possible that tax changes could be introduced in the Budget announcement later this month, and 5 April 2010 is looming fast.

With it being an election year, major tax changes could be deferred until after the election. One thing is for certain, the Government needs to reduce spending and increase tax revenues. Tax rates are only going to go one way and that is upwards.

So if any of the above circumstances apply to you, then you need to act fast.