UK: Capital Gains Tax Changes. What Should You Be Doing? Sell Now Or Sell Later?

In his Pre-Budget Report, the Chancellor announced that from 6 April 2008, taper relief and indexation relief will be withdrawn and Capital Gains Tax (CGT) charged at a flat rate of 18%. Whilst it is possible the proposal may never become law, the safest option is to assume it will.

Taper relief reduces the tax charge when an individual or trustee sells an asset. The level of the reduction, or the taper, is based on the period of time the asset has been held before being sold. Different levels of taper apply to business assets and non-business assets. For a business asset, taper relief can reduce the tax charge from 40% to 10%, provided the asset has been owned for at least two years before sale. Business assets include shares in unlisted trading companies, properties let to unlisted trading companies and shares owned by employees in their company. Taper relief replaced indexation relief, which reduced the tax on a sale by taking account of the effect of inflation.

The impetus for this change to CGT was almost certainly the furore over private equity managers paying 10% tax on what seemed to be effectively salary. Nevertheless, the Government's reaction catches everybody. In particular, it affects entrepreneurs and small-business owners who have been banking on the 10% tax rate applying when they come to sell their businesses. Now, if they wait until after April 2008, the tax charge will be 18%, a full 80% higher.

That said the 18% rate creates winners as well as losers, including second-home and buy-to-let owners, investors in listed companies and short-term investors in unlisted companies. Many of them qualified either for no or negligible taper relief and so were paying tax at the full 40%. Now, if they delay selling until after April, they could see their tax bill more than halved.

As the change is not effective until April 2008, there is still time for people to consider the options available and take appropriate steps to mitigate the impact of the tax changes. For example, if your current CGT rate is 10% and you are contemplating a sale in the near future, the advice may be not to delay, but to sell now in order to avoid the impact of the tax increase. In contrast, if your current CGT rate is above 18%, the best advice may be to delay a sale. Although commercially you may have little or no choice over timing, in tax terms it may be crucial to fall on the right side of the April deadline.

Even if you are not contemplating a sale in the near future, there are several strategies that may enable you to crystallise the 10% tax charge on the growth of the value of your assets to date. Although these generally involve having to pay 10% tax on a "paper" gain, with the risk that the assets may later fall in value, it may be possible to take a "wait and see" approach without jeopardising the availability of the 10% tax rate.

In the past, loan notes have been used to defer a tax charge on the sale of a business. Due to the changes it may now be better in tax terms not to take them. For those with existing loan notes, it may be better to dispose of them before April. Similarly, any existing earn-out arrangements should also be examined very carefully to see if previous tax advice still makes sense.

Irrespective of the tax strategy you choose, it is important to look beyond just the CGT results. The impact of other taxes will need to be considered and also any possible cash flow or other commercial issues. However, the prize - a possible tax saving of around 50% - should not be forgotten.