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Autumn Pre-Budget Report
When Gordon Brown moved the date of the pre-budget report forward to 9 October many thought that this was part of a pre-election strategy. It didn't turn out like that but it did grab our attention for other reasons. Perhaps some response to the political pressure on Inheritance Tax was inevitable but the proposed changes to Capital Gains Tax were something right out of the blue.
Inheritance Tax (IHT)
The easiest way to explain the changes here is to look at a simple example. Fred and Jim are civil partners (treated the same for IHT as a married couple) and have arranged their affairs so that they each have £300,000 of assets. In January 2007 Fred dies leaving his entire estate to Jim. In March Jim dies leaving his estate (now £600,000) to his sister Alice. The first £300,000 of Jim's estate is exempt from IHT but the remainder is taxed at 40% leaving Alice with a tax bill of £120,000.
To avoid this liability arising accountants and solicitors would have been thinking (before Fred's death) of ways in which his exempt allowance of £300,000 could be used rather than lost as it was in the example. A number of options were available for the more informed and farsighted taxpayer which would have resulted in no IHT being payable but it would have required forethought or, at least, expensive professional advice.
In the case of widows, widowers, or surviving civil partners who die on or after 9 October 2007 forward planning is not required as a simple claim to transfer any unused nil-rate band from the original deceased spouse or partner will be sufficient to achieve the same aim. In our example Jim effectively inherits the whole of Fred's nil-rate band and has therefore £600,000 of nil-rate band available on his death leaving Alice with no tax bill.
Capital Gains Tax (CGT)
It is proposed that from next April all indexation and taper relief will be abolished for individuals and CGT will be applied to all gains, apart from the normal annual exemption, at a tax rate of 18%. Existing exemptions for private residences, rollover relief etc will still be available. While the new system sounds simple it has potentially far-reaching and unpleasant impacts on business owners. A couple of examples will help illustrate.
Jack has been in business for 20 years. He has built the business from nothing and is now retiring and selling his entire interest for £250,000. Lets assume he has used his annual exemption elsewhere and is a 40% taxpayer. If he sells before the proposed change he will be entitled to full business taper on his gain ie 75% of £250,000 leaving £62,500 chargeable at 40% = £25,000. If he sells after the change he will pay 18% of £250,000 = £45,000!
Joe buys and sells shares as a hobby. He bought some shares in 2006 for £100,000 and they are now worth £350,000. He also has no exemption left and is a 40% taxpayer. If he sells before the change he will pay tax at 40% of £250,000 = £100,000. If he waits until after the change he will pay 18% of £250,000 = £45,000. It seems fairly clear what kind of activity Mr Darling wishes to reward!
Your CGT planning needs updated. If you think you have a problem please get in touch. Good sense may prevail and sensible transitional provisions may apply but we must make sure that we are prepared for all eventualities.
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