Don’t Lose Out On 6th April 2008
Over the last few months the Chancellor’s difficulties regarding Northern Rock, missing Child Benefit disks and how to tax non-domiciled UK residents, have been the subject of a lot of press comment. These issues have been interesting enough, but they have deflected a lot of worthwhile attention away from the radical changes that are going to be made to Capital Gains Tax (“CGT”) on 6th April 2008. Whilst the CGT changes will undoubtedly benefit some people, they will also adversely affect a significant number of others, particularly married couples and civil partners, unless pre-emptive action is taken before 6th April. Time is, therefore, very much of the essence.
It is impossible in a short summary like this to run through all of the changes that are about to be made, so the sole purpose of this note is to focus on the immediate action that married couples and civil partners should take in order to bank what is potentially a very valuable tax relief, namely “Indexation Relief”.
Indexation Relief was introduced in 1985 in order to prevent people paying CGT on inflationary gains. Put simply, the Relief allows the base cost of an asset to be increased by inflation between when the asset was bought (or March 1982 if purchased before then) and April 1998. The Relief stopped in 1998 when Gordon Brown froze the benefit at the levels that had been built up by that date. The Relief was not abolished, however, so many people who have been selling shares, holiday homes or other assets over the last 10 years have been able to benefit from the indexation that they had earned up until 1998. The current reason for concern is that, in terms of the new rules, Indexation Relief will finally be abolished on 6th April.
The good news for married couples and civil partners is that it is possible for the accumulated benefit of Indexation Relief to be preserved. All that is needed is for one spouse or partner to gift the asset concerned to the other spouse or partner before 6th April.
As an example, if a holiday home costing £30,000 was bought in the husband’s name in the summer of 1982, that asset will now have a base cost including indexation of around £60,000. If no action is taken before 6th April, indexation will be lost and the base cost of the asset on any future sale will be restricted to the original £30,000. Transferring the house into the wife’s name before 6th April, however, secures the higher base cost of £60,000, which could ultimately result in a CGT saving of £5,400 on any future sale. The same principle applies to other assets held in either spouse’s sole name pre-April 1998.
Couples with holiday homes, buy-to-let properties or share portfolios should all consider whether they would benefit from taking action, but it is vital that action, where appropriate, is taken before 6th April. Don’t delay and miss out!
If you feel that you should be considering your tax planning options before 6th April, please telephone your usual contact within the firm.
Article compiled by Tom Monteith
Posted by Sharon Clift on Feb 20, 2008
