Kirkpatrick & Hopes - Succession Planning Accountants

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Should I pay tax now to save tax in the future?

We have a new government and a new tax regime and an extra budget this year fixed for Tuesday 22 June.

There is expected to be an increase in the rate of Capital Gains Tax. This is currently 18% on profits made on the sale of quoted shares and assets such as buy-to-let property. The annual exemption, the tax-free amount, is currently £10,100.

The Liberal Democrat election proposals wanted to tax Capital Gains at your highest income tax rate and reduce the tax-free amount to only £2,000 a year.

Capital Gains Tax is broadly going to follow these proposals and this will mean that from 22 June the amount of tax you pay when selling your shares or let property could more than double. The current rate of 18% may be replaced by a tax rate of 40%.

Should you sell assets before 22 June to pay tax at the lower rate? This is a difficult question to answer. Capital Gains Tax is a voluntary tax. It is only payable if you sell something. If you do not sell, there is no tax to pay.

If you were thinking of selling, the advice must be to sell now. You will have less tax to pay if you sell the asset before 22 June. You will pay 18% tax on any gain. The tax due is payable on 31 January 2012.

If you have a property to sell, it is unlikely that the sale will be processed before the 22nd unless you are already working through the sale process. The effective date for Capital Gains Tax is exchange of contracts. So, provided you exchange before the 22nd, you will pay 18% on any property sale even if the completion is some time after that date.

If you have no plans to sell because you own the shares or buy to let as a long-term investment, then my advice is to do nothing.

The difficulty arises if you have plans to sell something shortly, say in one or two years from now.

It is possible using trusts to crystallise a gain based on the current market value of the asset. This will give you a tax bill now at the 18% rate. There will be further tax to pay when the asset is eventually sold, based on the difference between the sale price and the value at the date of the original transfer. This should reduce the overall amount of tax payable.

You would need to move swiftly to have this planning in place before the 22nd. You are giving yourself an immediate tax bill payable on 31 January 2012 that you will need to fund from your own resources. There will also be legal costs of putting all the planning in place.

If there are significant amounts of tax at stake and you are planning to sell, then the advice is to find out more. Otherwise I suggest you do nothing.

Contact me if you would like to discuss this further.

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