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In a statement issued on 11 May, the new coalition government confirmed that they will seek to tax non-business capital gains at rates similar or close to those applied to income. This is caveated that there will be ‘generous exemptions' for entrepreneurial business activities.

How far could rates rise?

The current CGT rate is 18%. This is reduced to 10% under Entrepreneurs' Relief for certain business gains up to £2m. The proposals, as they stand, would see the 18% rate rise to 40% or even 50%, in line with current income tax rates. Therefore, the rate on certain assets may rise by more than 20-30% overnight.

Who might be affected?

Based on the current distinctions between ‘business' and ‘non-business' assets, the following individuals and groups may be affected directly by a rate change:

• Individuals or trusts directly holding residential or commercial property (e.g. let properties and second homes).
• Shareholders of investment companies.
• Owners of business assets or trading companies standing to make a substantial gain.
• Shareholders in trading companies that do not work for the business and hold 5% of the voting shares.
• Private equity firms with carried interest.
• Individuals with previously deferred or rolled-over gains (e.g. under the Enterprise Investment Scheme).
• Holders of listed stock and securities.
• Holders of loan notes following an earlier sale of their business.

Timing of the rate increase?

A second budget will be held before the end of June or in early July and it is possible that further details of the change will be revealed then.

Given the dire state of the public finances, a change could take place immediately, although as this would be part way through the tax year, it is likely that any change would take effect from 6 April 2011. However, these days it is clear that anything is possible, so be warned!
What can you do?

Details of how the new rules will work will only become clear over time, and the government will no doubt have an eye on preventing avoidance by keeping details secret until the last possible minute. However, there will inevitably be some winners, and indeed many losers, so it is wise to consider your actions now and be ahead of the game.

There are various courses of action that are available to crystallise capital gains ahead of any rate change. These include:

• Bed & breakfasting quoted stock and securities to bank the 18% rate and use the CGT annual allowance of £10,100.
• Selling and repurchasing stock into pension schemes and ISAs - to avoid the 30 day buy-back rule.
• Selling or transferring commercial property or listed shares into pension schemes.
• Putting assets standing at a gain onto the market.
• Gifting assets into family trusts.
• Transferring shares with deferred EIS gains to bring the gains back into charge.
• Incorporating investment businesses.

Where uncertainty exists as to whether an asset may qualify as a ‘Business Asset' under the new rules, it is possible with specialist planning to engineer a disposal now without a requirement to pay over any CGT. Such an arrangement can be unwound later on, should the asset be treated favourably under the ‘new regime'.

In summary

Overall the message is clear. If you are concerned about a rise in CGT rates, you need to consider your position now and take specialist advice from your Target tax consultant on how this can be best protected in the future.