The current 18% flat rate of capital gains tax (CGT) gives a clear incentive to those who can convert income into gains to avoid the new highest income tax rate of 50%.

The LibCon coalition has stated that it will seek to look at moving CGT rates on non business assets closer to income tax rates with suggestions being made by commentators that gains may be treated as being taxed at 40% for higher rate tax payers, or even being treated as the top taxable slice and being subject to 50% for those with incomes in excess of £150,000.

The biggest question being posed is when would any possible increase take effect from? The budget is set for 22 June 2010 and there is speculation that any increase would be effective from midnight but a mid-year change could lead to practical difficulties. Alternatively, any change could be made from the following 6 April 2011 giving time for taxpayers to take advantage of the current low rate of CGT. It is also not beyond the realms of possibility that any change could be made retrospectively from 6 April 2010!

It has also been suggested that the current CGT annual exemption of £10,100 could be cut to as low as £2,000 bringing many more gains within the charge to tax.

Despite this uncertainty many clients are wondering if they should sell assets now to take advantage of the 18% tax rate potentially buying them back after the 30 day period required to avoid a matching of a sale with a subsequent reacquisition. Alternatively, sales to family trusts or other family members are being considered to bank the current 18% rate. However, if there is a retrospective increase in rates, such planning will land the taxpayer with an unexpected high CGT bill!

Perhaps one should step back and look at the wider picture. CGT raises a relatively small amount of tax. The top tax ‘earners’ for the government are income tax, national insurance and VAT. With the back lash from the middle classes and within the coalition itself on the possible CGT increase we may not see a change in CGT rates at least this time round!
Difficult times; as this new government is an unknown quantity. Clients who really feel they would like to do something now, ahead of the emergency budget, need to be aware of the risks and the various opportunities that may be available to them based on their individual circumstances.