Rich man's tax lowers its sights

Carole Slingsby explains how to sidestep the dangers of capital gains

IN 1997/98 we paid nearly pounds 104bn in direct taxes. Of this a mere pounds 1.1bn was in capital gains tax. But while CGT is not a big money spinner for the Government, you do not have to be rich or even particularly well- heeled to be caught by it. Because of changes to the rules in the Budget in March, more people are likely to face CGT bills in future.

You may have to pay CGT when you dispose of - meaning give away or sell - assets that have gone up in value.

Assets include shares and other investments (but not money in savings accounts), property and, for the self-employed or people working in partnership, your business premises if you own them. CGT is not payable on death and your own home is exempt. But selling a second home could mean you have some CGT to pay.

The CGT rate you pay depends on your top income tax rate and the length of time you have owned the asset. The maximum rates are 40 per cent for higher rate taxpayers and 23 per cent for basic rate payers.

It is easy to think that CGT is unlikely to apply to your investments when you cash them in. Indeed, the panicky state of the stock market means most shareholders are currently more concerned about their investments falling in value than realising a capital gain.

But if you own quite a lot of shares or unit trusts that are not sheltered in tax-free PEPs, it is worth bearing in mind that investors who hung on to their shares throughout 1987, the year of the Black Monday crash, generally did quite well.

Not all of a capital gain is taxable and the various reliefs mean that you can cut the gain substantially or perhaps wipe it out.

In some circumstances it is even possible to postpone the gain for an indefinite period, for example with business assets you sell, by rolling over the gain (reinvesting in more assets) in another business.

Everyone gets an annual CGT exemption of pounds 6,800. And indexation relief will reduce your capital gain for any period of ownership between 31 March 1982, and 5 April 1998. Indexation removes the element of gain due purely to inflation.

From 6 April 1998, this relief has been replaced by the new taper relief. Tax advisers believe that taper relief and other rule changes could bring more ordinary investors into the CGT net. The taper reduces the size of the taxable gain you are liable for, depending on the length of time - up to a maximum of 10 years - that you have owned the asset.

This relief is more generous for business assets (see the table), reducing taxable gains after 10 years to 25 per cent and the rate at which CGT is effectively charged on the whole gain from 40 per cent to 10 per cent for higher rate taxpayers; from 23 per cent to 5.75 per cent for basic rate payers. For non-business assets such as investments, the taper reduces the gain after 10 years to 60 per cent and the effective rate of tax to 24 per cent for higher rate payers; to13.8 per cent for basic rate payers.

For assets you owned before 17 March, the date of the Budget, you are allowed an extra year's worth of taper relief.

Because of the taper another relief, business retirement relief for those aged 50 or over, is being phased out by 2003.

For 1997/98 the maximum relief is 100 per cent of the first pounds 250,000 of capital gain and 50 per cent of the next pounds 750,000 for business assets owned for 10 years or more.

Each tax year until 5 April 2003, retirement relief will fall in stages to zero.

Keith Taylor, marketing manager of the Medical Insurance Agency, an independent financial adviser, says although retirement relief is going, there is a silver lining.

"Unlike retirement relief, taper relief applies regardless of age so in future if you sell business assets in your forties, depending on the number of years of ownership since 6 April, 1998, any gain can be reduced substantially."

Investors with shares can no longer use the classic CGT avoidance gambit known as "bed and breakfasting" as this was outlawed in the Budget.

"This involved selling shares one day to realise a gain within your annual exemption (pounds 6,800) and buying them back the following day," said Mr Taylor.

Now, this tactic will only pass muster if 30 days separate the sale and repurchase, but the longer period could prove counter-productive if share price rises significantly, so that it costs a lot more to buy them back. You can get round the 30-day rule by exchanging shares you own in, say, the Halifax for a Pep that holds Halifax shares (known as "bed and Pepping") or by exchanging your shares for unit or investment trust holdings, as technically the fund managers will own the shares.

Other CGT-saving ploys include transferring assets between husband and wife, as gifts to spouses do not trigger a taxable gain. For example, you might wish to do this if your spouse's annual exemption will not otherwise be used, but you have already used up your own exemption. There are snags with this, not least that the gift must not have any strings attached.

So your spouse must be able to do whatever they like with the asset. If he or she chooses to sell it immediately, the Inland Revenue may decide to tax you as if the transfer had not taken place.

Although highly complex CGT is not a tax that should keep the average investor awake at night. However, if you are concerned the gains you make will not be covered by the annual exemption and the other reliefs, get some professional advice.

Carole Slingsby is group finance editor of 'General Practitioner' newspaper and 'Medeconomics' magazine

making gains

Most bookshops sell tax guides aimed at the non-expert. Make sure any guide you buy has been updated for the 1998 Finance Act.

The Inland Revenue publishes free leaflets and booklets. Contact any tax enquiry office or tax office (in your phone book under Inland Revenue).

If you have Internet access, most Inland Revenue leaflets are available on www.inlandrevenue.gov.uk

Assets exempt from CGT include:

Your only or main home.

A home you own which has been occupied rent-free by a dependent relative prior to April 5 1998.

'Wasting' assets with a useful life of 50 years of less (eg a caravan).

Gifts of assets between spouses.

Gifts on death (although there may inheritance tax to pay)

Prizes including National Lottery and bettings winnings

Gilt-edged stock (government stock) and qualifying company loan stock.

Savings held in cash (eg in savings accounts).

Building society permanent interest bearing shares (PIBS).

Most cashbacks (ie incentives to take out mortgages).

Venture capital trust shares.

Investments gifted to charity.

Life insurance policy proceeds (unless policy was bought secondhand)

All National Savings products.

PEPs and from April 6 1999, individual savings accounts (ISAs).

Personal belongings (chattels) sold for less than pounds 6,000.

News
people
Sport
FootballGerman sparks three goals in four minutes at favourite No 10 role
News
Rumer was diagnosed with bipolarity, attention deficit hyperactivity disorder and post-traumatic stress disorder: 'I was convinced it was a misdiagnosis'
peopleHer debut album caused her post-traumatic stress - how will she cope as she releases her third record?
Sport
A long jumper competes in the 80-to-84-year-old age division at the 2007 World Masters Championships
athletics
PROMOTED VIDEO
Sport
Radamel Falcao was forced to withdraw from the World Cup after undergoing surgery
premier leagueExclusive: Reds have agreement with Monaco
Arts and Entertainment
'New Tricks' star Dennis Waterman is departing from the show after he completes filming on two more episodes
tvHe is only remaining member of original cast
Life and Style
Walking tall: unlike some, Donatella Versace showed a strong and vibrant collection
fashionAlexander Fury on the staid Italian clothing industry
Arts and Entertainment
Gregory Porter learnt about his father’s voice at his funeral
music
News
ebooksAn unforgettable anthology of contemporary reportage
Arts and Entertainment
tvHighs and lows of the cast's careers since 2004
Life and Style
Children at the Leytonstone branch of the Homeless Children's Aid and Adoption Society tuck into their harvest festival gifts, in October 1936
food + drinkThe harvest festival is back, but forget cans of tuna and packets of instant mash
Sport
Lewis Hamilton will start the Singapore Grand Prix from pole, with Nico Rosberg second and Daniel Ricciardo third
F1... for floodlit Singapore Grand Prix
New Articles
i100
Life and Style
Couples have been having sex less in 2014, according to a new survey
life
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Senior BA - Motor and Home Insurance

£400 - £450 Per Day: Clearwater People Solutions Ltd: **URGENT CONTRACT ROLE**...

Market Risk & Control Manager

Up to £100k or £450p/d: Saxton Leigh: My client is a leading commodities tradi...

SQL Developer - Watford/NW London - £320 - £330 p/d - 6 months

£320 - £330 per day: Ashdown Group: The Ashdown Group have been engaged by a l...

Head of Audit

To £75,000 + Pension + Benefits + Bonus: Saxton Leigh: My client is looking f...

Day In a Page

Scottish referendum: The Yes vote was the love that dared speak its name, but it was not to be

Despite the result, this is the end of the status quo

Boyd Tonkin on the fall-out from the Scottish referendum
Manolo Blahnik: The high priest of heels talks flats, Englishness, and why he loves Mary Beard

Manolo Blahnik: Flats, Englishness, and Mary Beard

The shoe designer who has been dubbed 'the patron saint of the stiletto'
The Beatles biographer reveals exclusive original manuscripts of some of the best pop songs ever written

Scrambled eggs and LSD

Behind The Beatles' lyrics - thanks to Hunter Davis's original manuscript copies
'Normcore' fashion: Blending in is the new standing out in latest catwalk non-trend

'Normcore': Blending in is the new standing out

Just when fashion was in grave danger of running out of trends, it only went and invented the non-trend. Rebecca Gonsalves investigates
Dance’s new leading ladies fight back: How female vocalists are now writing their own hits

New leading ladies of dance fight back

How female vocalists are now writing their own hits
Mystery of the Ground Zero wedding photo

A shot in the dark

Mystery of the wedding photo from Ground Zero
His life, the universe and everything

His life, the universe and everything

New biography sheds light on comic genius of Douglas Adams
Save us from small screen superheroes

Save us from small screen superheroes

Shows like Agents of S.H.I.E.L.D are little more than marketing tools
Reach for the skies

Reach for the skies

From pools to football pitches, rooftop living is looking up
These are the 12 best hotel spas in the UK

12 best hotel spas in the UK

Some hotels go all out on facilities; others stand out for the sheer quality of treatments
These Iranian-controlled Shia militias used to specialise in killing American soldiers. Now they are fighting Isis, backed up by US airstrikes

Widespread fear of Isis is producing strange bedfellows

Iranian-controlled Shia militias that used to kill American soldiers are now fighting Isis, helped by US airstrikes
Topshop goes part Athena poster, part last spring Prada

Topshop goes part Athena poster, part last spring Prada

Shoppers don't come to Topshop for the unique
How to make a Lego masterpiece

How to make a Lego masterpiece

Toy breaks out of the nursery and heads for the gallery
Meet the ‘Endies’ – city dwellers who are too poor to have fun

Meet the ‘Endies’ – city dwellers who are too poor to have fun

Urbanites are cursed with an acronym pointing to Employed but No Disposable Income or Savings
Paisley’s decision to make peace with IRA enemies might remind the Arabs of Sadat

Ian Paisley’s decision to make peace with his IRA enemies

His Save Ulster from Sodomy campaign would surely have been supported by many a Sunni imam