Investors offload assets as worries over CGT strike home

SCOTTISH investors are scrambling to sell their assets to escape an expected hike in capital gains tax (CGT), according to financial advisers and property companies.

IFAs in particular are being bombarded with calls from clients worried about the impact of an increase in the rate of CGT of up to 50 per cent.

Shares and funds, investment properties, second homes and collectibles are all being offloaded before the new government confirms in its emergency Budget next month that CGT will increase sharply from the current rate of 18 per cent. It is likely to be moved in line with income tax, meaning investors will pay 20, 40 or 50 per cent on the gains from any disposals, although it is possible that 40 per cent would be the ceiling. The change is likely to take effect next April but experts have not ruled out immediate legislation next month.

CGT is charged on the gains over the financial year, with an allowance of 10,100 before it is applied and minus any losses in that year or brought forward from previous years. The Lib Dems have called for this allowance to be cut, perhaps to as low as 1,000, but this is now thought unlikely.

Graeme Forbes, chartered financial planner at Intelligent Capital in Glasgow, said the firm was being inundated with calls for advice on CGT. "Those with residential or buy-to-let properties are considering selling, but realise there is not enough time to do so. Those with unit and investment trusts are considering selling also and they could do so much more easily," said Forbes.

However investors have been warned to be on their guard against banks and unscrupulous advisers using the CGT hike to boost commissions by selling them investment bonds – which offer returns of up 5 per cent a year free of CGT – where they are not suitable.

Paul Lothian, chartered financial planner at Verus Financial Planning in Dundee, said: "Advisers should wait until details of the new regime are known, but inevitably some will use any change in CGT as an excuse to "churn" investments."

The decision of when to sell investments is rarely clear cut and experts advise against letting the tax tail wag the investment dog. Add to that the lack of detail around the chances of the threshold being slashed or indexation or taper relief being reintroduced, and selling in a hurry does carry risks.

Forbes advised basic rate taxpayers in funds or shares to consider selling now, remain in cash and reconsider their options after the Budget. "Perhaps the CGT regime will not be as draconian as expected and options can be considered then," he said. "Selling existing unit and investment trusts and shares is a quick and relatively low cost way of consolidating and with markets as volatile as they are, cash is not a bad place to be for a month or two until volatility settles down."

Those with property who are higher rate taxpayers should consider transferring their asset to a spouse who is a nil or basic rate taxpayer, according to Forbes.

He added: "Capital investment bonds remain an efficient way for higher rate tax payers to invest in collectives (unit/investment trusts), suffering an effective rate of tax at 20 per cent."

The predicament for property investors wanting to avoid the hike in CGT is complicated by the muted housing market. With house prices still subdued investors who bought into residential property relatively recently are likely to have few gains to crystallise, said David Alexander, head of D J Alexander residential letting agency.

"Capital growth has more or less stalled over the past two and a half years, so anyone who bought a property four or five years ago and chooses to sell now may find themselves with a rather limited surplus – presuming, of course, that they can find a buyer."

Alexander urged investment landlords to consider their individual position "very carefully" before rushing to beat the tax increase. While those that bought rental property in so-called prime areas ten or more years ago are best placed to profit from selling now, that may not be the case for investors who bought within the last five years.

Colin Clark, agricultural partner at Pagan Osborne, agreed that people with assets that had risen significantly in value since they bought them should consider transferring or selling them now, provided they can afford to live without them.

"They could think about making a gift to a family member before 22 June to lock into the current relatively low CGT rates and reliefs," said Clark. "It would be a shame to wake up on 23 June and find the rates have increased significantly."

As long as the contract of sale is completed in time it will escape the higher rate, as it is the date on which the contract is agreed that is relevant, not the date the buyer takes occupancy.

The prospect of higher CGT is also exercising owners of antiques and collectibles, with valuation services reporting a sharp increase in both the number and value of items they are being asked to price.

Patrick van der Vorst, founder of the online valuation service Valuemystuffnow.com, said: "This suggests people are working out their potential tax liability, anxious that if CGT rises from 18 to 40 per cent and the annual exemption allowance is reduced from 10,100 to 1,000 or 2,000 they avoid the higher tax rate.

"Quite a few of our clients have several items valued at the same time and it is easy to exceed the exemption limit but it is also important that owners do not pay tax unnecessarily."