Still time to act on CGT before April 5 deadline
SHOULD you be thinking about banking the 10%/18% Capital Gains Tax (CGT) rate in case of a rise in the CGT rate?
Although the Chancellor’s Pre- Budget Report back in early December of last year did not make any formal announcement, most people believe that the CGT rate is unsustainable at 18% (with the first £1m at 10% if Entrepreneurs’ relief applies) and unlikely to remain as low as it is for much longer.
Combined with the 50% income tax rate for high earners (effective from April 6, 2010 on those individuals earning over £150,000 on all their combined income) now may well be the ideal time to assess your options and take advice on likely purchaser and investor appetite. It is important to be clear on the building blocks and timeline to get a successful transaction completed which, although tight, can still be achieved pre-April 5, 2010.
In fact there is increasing evidence that some business owners are of the opinion that they have one last chance to sell their business at low tax rates and that if they don’t take action now they may have to wait several years (and continue to grow the value of their business in the meantime in difficult market conditions) to achieve the same post tax result on any future exit.
There are also ways of locking in the lower rate of tax even if the sale process starts but the deal completion timetable extends beyond April 5, 2010.
The proven opportunities which should be considered include:
Bringing forward a third party sale – deal activity has picked up over recent months albeit from a very low base and still well below the halcyon days, pre credit crunch.
Creating a definite “internal” CGT disposal event with no immediate sale envisaged to ‘bank’ the low tax rates that currently apply. (Such structures should be used with caution as cash will be needed to fund the ‘low’ tax liability created.)
Creating an “internal” disposal opportunity and banking the lower tax rates. This is especially useful where the envisaged third party sale won’t be completed pre April 5, 2010.
We would hope that any increase in CGT is announced with a later effective date to give some time to plan. However anti-forestalling legislation may be proposed and implemented (as was the position in respect of the latest round of changes to the pension legislation). This would prevent “internal” CGT disposals to bank 18%, so those with large gains may want to consider action soonest.
We successfully implemented similar arrangements to those highlighted above on many clients back in March 2008 when the rate increased away from the very attractive 10% business asset taper relief to the all encompassing 18% rate. These clients are congratulating themselves on calling the top of the market whilst incurring very low tax rates.
:: David Ward is senior manager, tax, at PricewaterhouseCoopers, Newcastle. Call 0191 269 3267 or email david.ward@uk.pwc.com
