Below is another blog from by colleague Barry Hallam, who writes for our sister blog Tax Plus...

It is being reported by the Daily Telegraph that the Government is considering a number of options relating to concessions on the new capital gains tax regime. One of these seems to be the ability to “opt for a deemed sale” before 5 April 2008 to lock into the favourable business taper and indexation relief. Presumably this would be a way of crystallising a gain without resorting to such devices as trusts.

As the Telegraph points out there will be risk associated with this especially if the eventual sale proceeds are less than the deemed proceeds. It will also mean paying the tax a year earlier.

There is a deadline of 31 January 2009 mentioned and it would appear that this is to coincide with the filing date for 2007/2008 tax returns.

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I wanted to draw your attention to a blog posted by my colleague Barry Hallam on our sister blog Tax Plus blog...

It is being reported that Chancellor Alastair Darling will not be able to announce his revised proposals in the three weeks that had been promised. He told MPs today:

"It is not now going to be possible to conclude that process until the New Year,"

This is because he needed more time to study various, differing representations.

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Now that the dust has settled over the pre-budget report, it is an ideal time to consider the implication it will have on company sales in the SME market. The headline news from the pre-budget was that a blanket rate of 18% capital gains tax is to be applied to all gains from 6 April 2008. This supersedes the current taper relief system, which could effectively reduce the capital gains tax rate on the sale of shares held for two years in a privately owned trading company to only 10%.

This effective rate of 10% is historically low and was well used by retiring businessmen and private equity fund managers alike to maximise their net proceeds from company disposals.

It is difficult to determine to what extent the low CGT rate has fuelled the number of disposals in recent years as the amount of private equity money and cheap debt have clearly also had a substantial effect.

The blanket rate of 18% is still very low – especially in comparison to the general higher tax rate of 41% (including national insurance). So in this accountant’s humble opinion, I do not believe that the level of company sales will change significantly following the pre-budget report (although I suspect we may get a pre 5 April 2008 rush). Indeed, I fear that the credit crunch this summer, which is likely to extend well into 2008, will have a far more profound effect on the level of company disposals than the withdrawal of business asset taper relief.

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I was asked recently for advice by a client, a 40% taxpayer. He wanted to make a substantial donation to charity, funded by the sale of an investment property. The property had a market value of £100,000 and the cost was £20,000.

Basically he had two choices : gift cash, or gift the property.

If he sold the property and gifted the funds to charity the position would be:

• Tax on the disposal £32,000, i.e. 40% x (£100,000 - £20,000). This assumes no taper relief is available
• Net £68,000 available to donate
• A qualifying donation of £87,179 (£68,000 x 100/78)
• Higher rate tax relief £15,692, i.e. £87,179 x 18% (40% - 22%) provided he has sufficient taxable income
• The charity would reclaim the basic rate tax of £19,168 (£87,129 x 22%) from HMRC

 If he gave the property instead the position would be: 

• Income tax relief of £40,000, i.e. £100,000 x 40%
• Charity receives a property worth £100,000, which it could then sell.
• No CGT charge on the charity
• No CGT charge on my client.
  

By giving the property itself rather than selling and giving the cash my client was £24,308 better off and the charity £12,871 better off (£100,000 - £87,179).

If taper relief at full rates had been available (and my client had enough income the result would reverse and a sale and cash gift would be better.

This is not easy – but it is always worth checking.

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