Capital plans to cut gains tax

Taxation: How to maximise your CGT allowances
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The Independent Online
The image of Capital Gains Tax (CGT) is perhaps as a tax solely for the privileged among us. To paraphrase the Monty Python sketch: "CGT? Luxury! I dream of having a CGT bill."

Even so, 75,000 people paid pounds 720m of CGT in the last tax year. And while we are promised by this Government that CGT is on its way out, in the meantime you will have to rely on prudent use of the annual exemption and simple planning to keep out of its clutches.

If the first you know of a CGT liability is a demand from the Inspector of Taxes, perhaps the most judicious first step in avoiding the tax is to learn how to roughly calculate it.

Capital gains come from the sale of assets - essentially something of an investment nature. Most gains (and losses) arise on shares; but second homes, antiques and the like are regularly caught. Things outside the net include your main home, cars (even vintage cars), gilts and everyday bits and pieces.

In its simplest form, the amount of the gain is calculated by deducting the cost price from the sale proceeds. Costs of buying and selling the asset - lawyers' fees perhaps - and improvement costs - putting in that central heating system in the cottage for instance - are deductible. So one lesson is to keep, or dig out, those old receipts and invoices.

The result of this subtraction can then be reduced by an "indexation allowance". This is based on the retail price index and is deducted to negate the effect of inflation for the period over which you have held the asset. (You can start with the value in 1982 if you held the asset before then.) Everyone then gets an annual exemption - pounds 6,300 for 1996/97 - and this is set against net gains for the year. The result is the amount on which you will pay tax at your marginal rate of income tax - which could well be 40 per cent, of course.

There are some immediate tax planning measures to improve matters. As all transfers between spouses are tax free, double the annual exemption by transferring assets to a (trusted) spouse well before sale. This is particularly tax efficient if they pay tax at a lower rate.

Another way to "double" the tax-free allowance is by spreading disposals over two tax years and, in doing so, taking advantage of two annual exemptions.

Capital losses can be set against capital gains. Losses arise from selling an asset at less than the total costs, of course. It may therefore be worth considering whether you own any shares standing at a loss which you could sell. This could bring your net gains down within the annual exemption. If you wish to retain your shareholding, consider selling and repurchasing the next day ("bed and breakfasting"), thereby securing the loss.

Equally, if you have not yet made disposals in the tax year, it may be worth disposing of assets up to the limit of the annual exemption to ensure it is fully utilised.

There are other means of reducing your liabilities. Useful reliefs exist for the deferral and reduction of CGT in the form of reinvestment relief and retirement relief. We'll come back to these and others in next week's article.

CGT is currently only charged on those who are resident or ordinarily resident in the UK. If you are due to move abroad on a fairly long-term basis, it may be possible to avoid CGT altogether by delaying the sale of assets until after you have left the UK. (A day trip to Calais won't do.) This get-out will probably get tightened under a Labour government, so the words of a Bob Dylan song, "If you gotta go, go now", may be appropriate for anyone thinking of such a course of action.

It is impossible to avoid politics in talking about CGT. The tax has been something of a political football since its introduction in 1965. The Conservative party has strenuously asserted that its long-term aim is to abolish CGT.

Labour and the Liberal Democrats have emphasised the importance of the tax in their policies and expressed a desire to tighten up on loopholes in the legislation. Labour has also talked of a two-tier CGT system, taxing longer-term gains at a lower rate, as happens in many other countries. Either way, it looks as if CGT is with us for the time being and worth minimising while you can.

John Whiting is a tax partner at Price Waterhouse.

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