The effective rate of tax paid by those in the private equity industry came in for a great deal of criticism in the media over the summer. This meant that some change in that sphere was expected, but few would have anticipated the significant restructuring of the capital gains tax (CGT) regime that has been announced – changes that are so far-reaching that many clients may want to consider their asset base to determine whether they would be better off (in tax terms) according to whether they sell before or after the changes take effect.
Under the new rules, the CGT rate on disposals of assets made on or after 6 April 2008 will be 18% for individuals, trustees and personal representatives. 18% sounds a dramatic saving compared to the current headline rate of 40% for a higher rate taxpayer. That comparison is misleading, however, for taper relief will often greatly reduce the effective rate – down to 24% after 10 years for most assets, and as low as 10% after only 2 years for business assets. When the rate reduces to 18% in April, both taper relief and the earlier indexation allowance are to be withdrawn, so some taxpayers will see an increase in their effective rate of tax on certain assets.
For example, higher rate taxpayers whose assets currently qualify for full business asset taper relief (an effective 10% CGT rate) will clearly be disadvantaged by the changes, as may those who had held an asset for a long time before the introduction of taper relief and who benefit from a high level of indexation relief. The further proposal to introduce automatic rebasing on 31 March 1982 may adversely affect individuals who own assets acquired before that date.
Conversely, if you have assets which would currently incur CGT at an effective rate higher than 18%, then the fact that the tax would be lower if you delayed a sale until after the end of the tax year is one factor to bear in mind in deciding on the timing of a sale.
Draft legislation is expected before the end of the year and the consultation process may result in some fine tuning, so it would be unwise to sell an asset – or to delay a sale – solely on the basis of these proposals. Moreover, the proposals and timetable may be significantly affected by current lobbying. It cannot be emphasised too strongly that many factors aside from tax will need to be considered in any decision whether to accelerate or postpone a particular disposal. However those with assets standing at a significant gain may be wise to review their investments in the coming months to see whether, purely from a tax perspective, they should consider realising those gains prior to 5 April 2008.