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TAX NEWS - may 2010

United Kingdom: Capital gains tax increase on the horizon

As part of the package of tax reforms agreed by the new Conservative-Liberal Democrat coalition government, there is a commitment to increase capital gains tax significantly for non-business assets. The coalition agreement published on 12 May 2022 indicates that this is intended to help fund the proposed increase in the personal allowance from April 2011. "Generous exemptions" for gains on business assets also are expected. Details of the reforms are limited, but the rate of tax on non-business assets will be more closely aligned with income tax rates, likely 20% for basic rate taxpayers and 40% for higher and additional rate taxpayers, although this has not been confirmed by the Treasury. There is also speculation that the capital gains exempt allowance will be reduced, which will bring many more individuals into the tax net. The generous exemptions may be enhancements to the entrepreneurs' relief, but this, too, is unclear. There could ultimately be three rates of capital gains tax: a 10% entrepreneur's relief (up to GBP 2 million), a lower rate for business assets and basic rate income taxpayers, and a higher rate.

It is not clear whether the increase in the rate will take place in the next tax year or whether there will be a mid-year change. Although a mid-year change has never been implemented in the past, there is nothing to suggest that this is impossible. The new government has announced that there will be a Budget on 22 June 2010, when details of the reforms are likely to be announced. With this in mind, taxpayers may be looking to bring forward disposals that are likely to suffer the increased rates, thus banking the 18% rate. For business assets, taxpayers may wish to delay disposals that may benefit from the exemptions mentioned. As the details have not been announced, it is not possible to tell whether business assets that would attract the current reliefs will be affected positively or negatively by the changes.

In the current market, it often will be impossible to accelerate asset sales at short notice to bank current rates without incurring the risk of selling assets at a significant discount, but there are ways of triggering gains without involving third party sales. Although each taxpayer's circumstances will differ, the following options may be possible:

- Crystallizing gains at current rates where the assets are marketable, whether by way of sale, redemption or gift;
- Using special purpose vehicles, whether to maintain future flexibility as regards completion of a sale or to limit the value of any gift made;
- Considering when to realize gains and losses to ensure an optimum set-off; and/or - For non-domiciled individuals, remitting gains to the U.K.

Although the objectives may appear straightforward, this can in fact be a relatively complex area and taxpayers should seek expert advice.
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