Once, mentioning tax was a sure way of getting people to clock off; today we pay so much that this is a topic of interest to everyone. In fact, according to the Adam Smith Institute, Tax Freedom Day this year fell on 2 June (if you take government borrowing into account, the date was really 14 June). In 1963 Tax Freedom Day was 24 April. (Tax freedom day is the notional time in the year, counting from 1 January, that we have finally paid our taxes and can start earning for ourselves!)

The changes to capital gains tax (CGT) announced in last autumn’s pre-budget report came into effect on 6th April 2008. For most people this is likely to be a matter of academic interest most of the time; but many could get caught at some time or other, so it is worth thinking about the way its impact can be minimised.

What is CGT?
CGT is the tax charged on the difference between what you sell for an investment and the original price to you. It does not apply to some items such as your primary residence (usually), your car, ISAs or PEPs, UK government bonds, personal belongings sold for up to £6,000 and winnings on betting, lottery or the pools.

There is also an annual exemption (£9,600 for 2008/9) and above this level all gains are taxed at a flat rate of 18%, unless you are entitled to Entrepreneurs’ Relief (see below), irrespective of the rate of income tax you pay. There is no longer any form of ‘taper relief’, so if you have held an asset for (say) 10 years the entire gain is liable to tax, rather than a reduced amount to allow for inflation.

Removal of the old ‘taper relief’, which cut some tax liabilities by as much as 75%, reducing the effective rate on some business assets to as little as 5.5% for basic rate taxpayers, means that some people are liable to much more CGT than previously.

Using the exemption
It is therefore important to ensure that, whenever possible, gains are realised in such a way as to minimise the liability. This can be achieved in a number of ways. Because each individual is eligible for the exemption individually and there are no prohibitions on transferring assets between husband and wife, a couple realising a gain of £19,200 between them during a tax year would pay no CGT at all.

In effect this means that timing and the ownership of assets is very important. If, for example, you purchased a block of shares five years ago for £50,000 and sold them now for £75,000, your gain would be £25,000 and, after allowing for your £9.600 exemption, you would have to pay £2,772 in tax. If on the other hand, you first transferred half the shares to your husband or wife, then each would have a gain of just £12,500 which, after each claiming the exemption, would produce a total CGT bill of just £1,044, a saving of £1,728.

If you were able also to hold some of the shares into the next tax year, it would be possible to remove the tax liability altogether (provided no other gains were realised.

Entrepreneurs’ Relief
Because those worst affected by the change (in practice) were business people who owned the companies they worked for, the Chancellor was forced to introduce a new form of relief that allows them to pay tax at just 10% on the first £1 million of gains, throughout their entire lifetime. However strict rules apply, including that the individual must have been an employee or officer of the business and that the gain is made on the disposal of all or part of the business and the assets have been held for at least a year.

It is important always to seek independent financial advice before making any decision regarding your finances. For further information, please contact Robert Bruce Associates on 0845 838 7377