Unless you qualify for Entrepreneurs’ Relief, all taxable capital gains in excess of the annual exemption, presently £10,100, would be taxable at 18%.

There has been speculation that this rate will increase to discourage schemes to have income treated as capital gains. Next year, 2010-11, the top rate of income tax will be 50%, with some marginal rates up to 61.5%. With capital gains tax rates at 18% and in some cases 10% (if a gain qualifies for Entrepreneurs’ relief) and an annual exemption for individuals currently up to £10,100 a year, the temptation to steer earnings towards capital gains and take advantage of legitimate planning devices, seems inevitable.

The Pre-Budget report will no doubt clarify these expected changes and as soon as we have up-to-date information you will be the first to know.

In the meantime a quick reminder of the types of gain that qualify for Entrepreneurs’ Relief.

The relief has been available since the 6 April 2008 when indexation relief and taper relief were withdrawn for individuals.

Basically the relief is available in respect of:

• gains made on the disposal of all or part of a business (this includes a sale of shares in a qualifying company)
• gains made on disposals of assets following the cessation of a business, and
• gains made by certain individuals who were involved in running the business

The first £1 million of gains that qualify for relief will be charged tax at an effective rate of 10 per cent. Gains in excess of £1 million will be charged at the normal 18 per cent rate.

An individual will be able to make claims for relief on more than one occasion, up to a lifetime total of £1 million of gains qualifying for Entrepreneurs’ Relief.

If you are interested in receiving more information regarding current tax planning in this area please call.

UK tax legislation relating to capital gains tax (CGT) and inheritance tax (IHT) is designed to  favour of marriage or Civil Partnership. The recent Budget has done nothing to change this.

Be aware that the phrase ‘common law wife or husband’ is misleading, if one partner dies without a will, the other will have no rights to the estate.

If you are committed to a long term life partnership with another individual, and you are not married or in Civil Partnership, the opportunities to mitigate CGT and or IHT are limited. This article discusses these limited options.

• Assets owned when relationship started. Generally speaking it has been difficult to transfer assets between partners that were owned prior to the commencement of their relationship. For IHT purposes the transfer would be treated as a Potentially Exempt Transfer (PET) – any potential liability would only disappear after a seven year period. The IHT risk could be insured against by taking out a seven year life policy, but of course you would have to pay the premiums!

If assets are transferred between partners, and the asset in question is subject to CGT on disposal, any such transfer will create a CGT liability. The only exception is if the market value of the assets at the date of the gift or transfer is the same as, or lower than the original cost. With most share portfolios now in a loss position this may open up opportunities to equalise estates by gifting across securities. This may also crystallise CGT losses for the donor which he or she could put to good use.

Depending on the type of asset, transfers may trigger Stamp Duty Land Tax charges.

And finally, gains on gifts of certain business assets can be rolled over.

• Assets purchased after the relationship started.  Assets purchased together after the relationship has commenced opens up the possibility of equalising estates by owning such assets jointly.

If there are concerns about unequal financial contributions made by partners to purchase the asset, these can be reflected in the percentage share.

In certain circumstances it may also be effective to use a trust to accommodate certain aspects of the transaction.

• Insurance. If IHT planning is ignored a partner surviving a first death may be obliged to sell assets, if the couple’s assets were significantly above their nil rate bands. (Currently £325,000)

This may involve the survivor selling the family home, or taking out a mortgage, to pay IHT.

This risk can be covered by a first death life policy written in trust for the benefit of the survivor.

Conclusion

Most unmarried couples are disadvantaged in the UK tax system. Ultimately the only way to redress this is for our Government to legislate and remove this bias, or for affected couples to actually get married or enter into a Civil Partnership. Obviously there are many important non-tax reasons why this may be an inappropriate course of action to take.

As expected the Chancellor has bowed to the small business lobby and offered a reduced CGT charge for gains realised on the disposal of certain businesses after 5 April 2008

- details are highlighted below. All the other declared changes to CGT are to go ahead. They will affect the tax charge on all disposals after 5 April 2008. There will be winners and losers in the process!

In a nutshell indexation and taper relief will no longer be available from 6 April 2008. All gains, with the exception of the gains on disposal of certain business assets, will be taxable at a flat rate of 18%. If you own assets which have appreciated in value since purchase you should certainly take a look at the possible opportunities to utilise the existing indexation and taper relief before 6 April 2008.

In laymans terms there is a short window of opportunity in which you may ‘bank’ indexation allowance which you are now entitled to but which will disappear in April. If you or your spouse own shares or property which you have owned since before 1998, you should discuss the opportunities with us as soon as possible. The clock is now ticking!

Entrepreneur Relief – The Revenue have called the reduced rate which will be applied to gains on disposal of certain businesses, as Entrepreneur Relief. The basic details are:

The first £1m of qualifying gains will be subject to tax at a flat rate of 10%. Gains in excess of £1m will be taxed at 18%.

The £1m is a lifetime limit. So it will be possible for an individual to make a series of qualifying gains at the 10% rate as long as the cumulative total does not exceed £1m, and the other conditions are met.

The new relief is based on the broad principles of the now extinct Retirement Relief. Unlike Retirement Relief the new rules will be simpler – there will be no minimum age limit, and taxpayers will qualify if the relevant conditions are met for just one year. (The qualifying period for Retirement Relief was 10 years.)