Industry Eye: Changes afoot in the world of taxation

During the recent election campaign we heard the phrase "the elephant in the room" referring to the government deficit and what measures were to be introduced to deal with it.

We are being conditioned to expect a rise in direct taxation and in particular capital gains tax to bring it in line with the current income tax structure.

That in itself is not something new. We saw in the last Government the cancellation of indexation allowance relief and the removal of taper relief alleviated by the introduction of entrepreneur's relief for the first 1m of lifetime gains on the sale of business assets and the reduction in the rate of tax to 18 per cent on non-business assets.

Entrepreneur's relief was then doubled in the Budget before the election, a move in some commentator's eyes as the first stage of an increase in the rate of capital gains tax after the Budget e.g. appear to give on one hand but take it back with the other so that there is no overall benefit.

We have become accustomed to capital gains tax being a consequential cost of the disposal or restructuring of assets, something which is there but by careful planning can be avoided all together or reduced to an acceptable level.

It is clear that there is an intention within this Government to make this tax generate more revenue either through an increase in the rates or a restructuring of the reliefs so that more transactions are brought into the capital gains tax net.

However at present there is no capital gains tax on death, being replaced by Inheritance Tax. So if you hold onto the asset without a disposal through sale or gift you will not be caught by these changes.

Doing nothing is not always the option available to us. We may wish to sell or transfer assets, restructure business operations etc all of which could potentially expose you to a capital gains tax liability.

In these circumstances there are reliefs available such as roll-over relief for reinvestment into new business assets, part-disposal relief, principal private residence and claims for loss relief for assets with a negligible value as well as hold-over relief on gift of business assets or gifts that are chargeable transfers for Inheritance Tax purposes.

We do not know whether these reliefs will survive after June 22 this year so those wishing to divest themselves of business assets through gift may wish to do so before the that date and claim hold over relief on the gain arising or where a sale is being contemplated you may wish to go to contract before that date.

As ever you should take advice from your professional advisors before you commit yourself to a transaction.

However the land lies after the Budget on June 22 we can expect that capital gains tax will become a more significant factor in transactions and will increase the requirement for considered planning before you commit yourself to a transaction e.g. sale or gift. Preferably that planning should start as early as possible so that any adjustments can be carefully considered without the pressure of completing the transaction.

So how do you eat an elephant?

In bite sized chunks, of course!

CW 5/6/10