To Property Owners, Farmers and Businessmen

Lawyers and Tax Advisers are advising that some taxpayers will be able to save substantial amounts of Capital Gains Tax (CGT) if they can transfer ownership of property before 6^th April 2008, and some will benefit by delaying a transfer until after that date.

1. Are you a husband, wife or civil partner who has owned an asset other than your main residence for a long time (i.e. since before 1998) in your sole name?

The asset is probably worth substantially more today that it was when you acquired it. It is therefore "pregnant" with capital gain and you will be liable for a substantial payment of CGT if it is sold or disposed of, other than on death.

At present you are entitled to "Indexation Allowance" in respect of part of the increase in value between 1982 to 1998 if for all or part of that period you owned the asset. After 6^th April, the right to Indexation Allowance is to be scrapped. Therefore if you sell or dispose of it after 6^th April, you will not be allowed Indexation Allowance.

Provided that you have absolute confidence in your relationship and trust your spouse or civil partner, you can transfer the ownership of the asset to him or her and "harvest" the accrued Indexation Allowance but this must be done before 6^th April.

No CGT is payable on such a transfer.

The tax saving is achieved in the following way:

The spouse or civil partner to whom the asset is transferred will acquire the asset at what is known as an "enhanced base cost" which will take into account all or part of the increase in value of the asset during your period of ownership.

When your spouse or civil partner later comes to sell the asset or dispose of it other than on death, the CGT payable will be less than would have been the case if you had retained it. He or she will be allowed the Indexation Allowance that you achieved during your period of ownership via the mechanism of the enhanced base cost.

This may sound complicated but it is an efficient method of Tax saving

You need to check with your Accountant and/or your Lawyer before proceeding.

You may have inherited or bought your land many years ago when land values were low compared with now. The Indexation Allowance for CGT has been available since 1982 and has been of great value to farmers on the sale of assets.

Any CGT payable on the sale or disposal of the land has been zero in some cases and in other cases very low - simply because of the Indexation Allowance. The Indexation Allowance is to be scrapped on 6^th April 2008.

To avoid losing the effect of the Indexation Allowance, tax advisers are recommending that you set up a simple (but appropriately worded) family trust and consider transferring the ownership of the land to the trust. This enables you to “harvest” the Indexation Allowance, and on a subsequent sale or disposal, the allowance will still be available but in another form, as it will have been frozen and added to the base cost for CGT purposes of the Trust .

You need to check with your Accountant and/or your Lawyer before proceeding.

3. Are you a businessman who has sold a longstanding business but bought another and who has delayed claiming Rollover Relief on the sale of the first business as you expect your new business to qualify for Business Asset Taper Relief and so you will only have to pay tax on the sale of the second business, thereby giving yourself better cash flow, possibly for many years?

With the withdrawal of “Taper Relief” on all sales/disposals after 6th April, there is an incentive for you to pay the tax on the sale of the first business (at the relatively low rate of 10% which remains available until 5^th April), and forget about Rollover Relief. You can still claim Rollover Relief but if you claim it, you will at the end of the day –on the sale of the second business - be paying CGT at the new rate of 18% ie almost double the tax will be due.

You need to check with your Accountant and/or your Lawyer before proceeding.

The answer is, “Don’t!” .You’ll be paying tax at 24 % at least before 6^th April.  After that the rate will be 18%. If you have owned for less than 10 years, the difference in the tax due could be even greater. Therefore, from exchanging contracts on the sale until after 5^th April and you will make a tax saving.

You need to check with your Accountant and/or your Lawyer before proceeding.

For advise on Capital Gains Tax including the points raised in this article or on the new Entrepreneurs relief for CGT, please contact either myself or our Property Partner Mrs Elizabeth West.

Richard Warner, 20^th February 2008

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