Can you beat the anticipated increase in Capital Gains Tax?
Leading London and Kent law firm Thackray Williams has seen a surge in demand from clients, nervous about potential tax changes in Labour’s first budget at the end of this month, looking to liquidise property assets.
The increased activity is across the board, with the Private Wealth and Real Estate sectors seeing particularly strong increases in instructions from clients looking to transfer and liquidise assets, prompted by concerns about the implications of measures tipped to be announced by the Chancellor on 30th October.
“We have seen a more than 200% increase in the last couple of months in enquiries from clients looking for tax advice and especially around the possibility of transferring assets out of their names to take advantage of the current rates of Capital Gains Tax (CGT),” says Elliot Lewis, who has headed the Private Client department since 2014.
“It has been widely predicted that Rachel Reeves will increase Capital Gains Tax, potentially from its current rates which range from 10 to 28% to as much as 39%. This has caused an enormous amount of anxiety and led to clients looking at bringing forward plans to transfer assets away to crystalise gains at what may be a cheaper tax rate,” he explains.
This is feeding directly into increased work for the Real Estate sector, with high levels of both homeowners and businesses with property trying to sell. “We have seen a 50% increase in instructions in the last three months, compared to the same period last year,” comments the sector head Vikki Herbert. “We also have a number of transactions with a deadline of 29th October.”
“The suggestion that pension pots could be liable to Inheritance Tax (IHT) is also prompting people to seek advice as to whether they need to rethink their investment strategies,” adds the Head of the Private Wealth sector, Anthony Macey.
The increased instructions highlight the need for long-term, strategic investment and tax planning, suggests Anthony Macey: “We can predict that governments, tax and legislation will change. It’s therefore advisable to have a wealth and tax management strategy that spreads your vulnerability across different types of investment, to reduce your exposure to any one tax change.
“Ideally, you should plan your personal and business investments and inter-generational wealth management with experts from the start. But, if like most people, you have grown your investments organically and now find yourself very exposed to potential changes in CGT or IHT, you should still take expert advice to understand all your options before making decisions that could have significant consequences.”
Vikki Herbert, head of Thackray Willams’ Real Estate sector comments, “Whether you can beat any increase in Capital Gains Tax will depend to a large extent on when any rise comes into effect. If Rachel Reeves announces an immediate hike, unless you have sold and completed the sale of your property on or before 29th October, you will be subject to the new rate.
“A delayed introduction may create an apparent window to complete sales while the current rates are in force. However, with many property investors nervous about the implications of leasehold reform and new renters’ rights, an increase in CGT may well accelerate decisions to disinvest.
“There is therefore a strong possibility of a glut of properties coming on the market as landlords and commercial property owners try and complete sales before any future increase. As we saw with the property boom in the pandemic, this can create bottlenecks, which still might make it ambitious to complete in time.
“The best way to manage any property portfolio is therefore to have a strategic investment plan for the long-term, rather than reacting to ad-hoc legislative and tax changes.”
Elliot Lewis, (Pictured) head of Thackray Williams’ Private Client department comments, “The difficulty with doing any tax planning at the last minute is always to ensure that you are doing these things for the right reasons and that you fully understand the implications of transferring assets across.
“There is quite a common misconception that if you are transferring an asset that has been an investment as a gift (so for no cash) it doesn’t give rise to any Capital Gains Tax (CGT) liability. Unfortunately, that isn’t correct; a gift is treated as a disposal for CGT in just the same way as a sale. Unlike a sale, however, you have no money with which to pay the CGT bill once it arises.
“There are a couple of options we look at for clients. If the amount is up to a maximum of £325,000 per individual (so £650,000 for a couple) you could consider transferring the assets into a Trust or a Trust for each person. A transfer into a trust is a chargeable event for Inheritance Tax (IHT), but as long as you put in no more than your IHT allowance of £325,000 then tax is charged at 0% so you wouldn’t have anything to pay.
“As it is a chargeable transfer, you can claim the benefit of holdover relief for CGT, meaning the asset is transferred into the Trust together with the gain. But it’s important to understand that you aren’t solving the CGT problem, simply deferring it to a later date.
“Another option is looking at transferring assets that don’t give rise to CGT, such as your main home. This is normally to be advised against, but if you have other properties that have inbuilt gains that you would be prepared to live in, then you could consider either gifting your main residence or selling it and gifting away the cash. This won’t be suitable for the vast majority of people, but in the right circumstances, it could be an option.
“But whatever you are considering, it is important to take bespoke advice. Everybody’s circumstances are different, while attitudes to paying tax are very personal, so having advice tailored for you is crucial.
“Whatever you do, don’t take advice from anyone who isn’t qualified – all too often we have to help clients who find themselves with an unexpected, large tax bill because they took informal ‘advice’ that turned out to be both wrong and very costly.”
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Andrew Stanton Founder & Editor of 'PROPTECH-X' where his insights, connections, analysis and commentary on proptech and real estate are based on writing 1.3M words annually. Plus meeting 1,000 Proptech founders, critiquing 400 decks and having had 130 clients as CEO of 'PROPTECH-PR', a consultancy for Proptech founders seeking growth and exit strategies. He also acts as an advisory for major global real estate companies on sales, acquisitions, market positioning & operations. With 100K followers & readers, he is the 'Proptech Realestate Influencer.'
