Capital gains tax changes for investments and property
Many investors have welcomed the proposed replacement of capital gains tax taper relief by a flat tax rate of 18% from 6 April 2008. Taper relief, now given only on disposals up to 5 April 2008, reduces tax according to how long you have owned the asset. But even with the maximum taper relief for non-business assets – on property and other investments owned since before 17 March 1998 – a higher rate taxpayer currently still pays tax at 24%.
However, the change would leave many basic rate taxpayers worse off. As long as you have owned investments for at least five years, your effective tax rate after taper relief is currently less than 18%. You might want to sell such investments before 6 April 2008, especially assets you have held since before 17 March 1998, on which your tax rate after taper relief is currently only 12%.
Another group that would lose out from the changes in April 2008 are people who acquired valuable investments a long time ago. This is because indexation allowance is also due to be abolished. Indexation allowance increased the cost of an asset by reference to inflation from 1982 until 1998, when it was replaced by taper relief. The indexation allowance accumulated up to 1998 was frozen and more than doubles the cost of assets acquired in April 1982 or earlier.
For example, if you sell a property that you bought in 1981 for £30,000, you can deduct the cost plus £31,410 in calculating your capital gain. Even this frozen indexation allowance is set to be abolished for disposals from 6 April 2008 – another reason to think about selling assets before then.
If you are married or in a civil partnership, you might be able to preserve the frozen indexation allowance by transferring assets from one partner to the other. You would not have to pay any tax on the transfer but your partner would acquire the asset at a ‘cost’ that includes the indexation allowance. This ‘acquired’ indexation would not be lost. There is some uncertainty about whether this strategy will work for assets originally acquired before 1 April 1982, but we expect this to be resolved soon.