Will you save tax by cashing in your assets now?

The capital gains rules change in April. Cherry Reynard explains who will win and who will lose when it comes to selling houses or shares
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The Independent Online

The financial landscape will be transformed on 6 April. Under reforms to capital gains tax, the top rate of CGT will be slashed from 40 to 18 per cent and the complex system of indexation and taper relief will be swept away.

On the surface this looks good news, but a substantial minority of people may be worse off. Anyone selling shares or property should do their sums, experts advise, to determine whether they will benefit more from cashing in now or waiting until the new rules come into effect.

"It is important not to let tax drive your decision-making, but if you are thinking about selling, consider the timing," says Danny Cox, head of the Financial Practitioners group at independent financial adviser (IFA) Hargreaves Lansdown.

In any one tax year, people can make a profit of £9,200 on the sale of a property (other than their main home), shares or other investments before CGT is triggered.

For gains above this amount, the current rules state that CGT will be charged at an individual's "marginal rate" – 40 per cent for higher-rate taxpayers, 22 per cent for lower-rate ones. This gain can then be reduced by various breaks. The indexation allowance, applying to assets bought between April 1982 and March 1998, compensates for inflation, while taper relief aims to reward people who hold assets for longer. Both allowances will disappear on 5 April.

"Private investors who are higher-rate taxpayers will generally be better off under the new rules because the lowest rate of tax available under taper relief is 24 per cent. However, those who hold assets from before 1998 and therefore qualify for indexation allowance, may be better off cashing in before 6 April," says Mr Cox.

Malcolm Cuthbert, head of financial planning at stockbrokers Killik & Co, reckons as many as 50 per cent of buy-to-let investors may be better off under the old rules. He says: "Our calculations suggest that a combination of indexation and taper relief could leave a lower effective rate of tax than 18 per cent. It could be as low as 14 per cent."

The same is true for some other investments. Shares in companies listed on the Alternative Investment Market attract a CGT rate of just 5 per cent for lower-rate taxpayers and 10 per cent for higher rate ones after two years of ownership – significantly lower than the 18 per cent that will be levied under the new rules.

Staff who own shares in their own firm are also likely to be worse off. Previously, if employees sold these shares, they would pay CGT at 10 per cent.

There is an exception: entrepreneur's relief, for those who own more than 5 per cent of the total shares in a company. Chancellor Alistair Darling (pictured) has said that these people will benefit from a 10 per cent CGT rate.

George Bull, head of tax at accountants Baker Tilly, points out: "Full-time working employees who, through incentive arrangements, own less than 5 per cent of their company's shares will not qualify for the new entrepreneur's relief."

He adds: "Of course, many employee share schemes have tie-ins, but where holders are wavering over a sale, selling before the end of the tax year will save around 8 per cent tax."

Another important area is investment bonds. Until now, investors have been able to reduce their CGT liability by holding these bonds, sold by insurance companies.

"These are now not as attractive. They are taxed at the basic rate, which is higher than the new CGT rate of 18 per cent,"says Keith Churchouse, director of IFA Churchouse Financial Planning. "These bonds are now only suitable for basic-rate taxpayers who want a steady income."

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