Brabners’ William Ngan gives advice on what to do if capital gains tax rises

ALTHOUGH the Government’s coalition agreement on Capital Gains Tax (CGT) was phrased in vague terms, the emergency budget on June 22 is likely to announce that CGT will increase from the current 18% to possibly 40 or even 50%, perhaps from the day of the budget but more likely April 6, 2011.

The new rate will apply to non-business assets such as second homes or share portfolios, and to employee shareholders who do not qualify for entrepreneurs’ relief.

But the scope of the exemptions for business activities are unclear, other than that there will be a distinction between business and non-business assets. When taper relief was available pre-2008, it reduced the effective rate of CGT on business assets (for example, shares in a private trading company) from 40% to 10% if it was held for two years.

Any taxpayer who currently holds assets standing at a gain, who is unlikely to qualify for the entrepreneurial business activities exemption, should consider whether to dispose of such assets now. This would allow the individual taxpayer to benefit from the current 18% rate which would be payable by January 31, 2012.

For those who cannot sell their asset but fear the rising rates, it may also be possible to “bank” the current lower rate, for example, by transferring the assets to a trust, which also creates a liability payable by January 31, 2012.