Capital Gains and Inheritance Tax

Capital Gains Tax (CGT) is a levy which may need to be paid when you sell certain assets, including property, shares or other investments such as antiques, art and cars.

Typically, a capital gain is generated when the asset or investment is sold, but it can also occur when a gift is given or even when a competition prize is won. The proceeds from selling a house are normally liable if it was a rental investment or a second home. Both companies and individuals must pay CGT, but there are different rules and exemptions for each. Essentially, CGT is charged on the proceeds of a sale, or the market value of a gift, less its original cost, and after any selling and improvement expenses have been taken into account.

Exemptions

CGT raises the meagre sum of £2.5bn a year, a relatively small amount compared with income tax or corporation tax. It is unlikely to be abolished, as it would open up a huge tax avoidance loophole which would allow individuals and corporations to convert income into capital. In other words, taxpayers might be tempted to turn down a salary in favour or gifts or company shares which they could sell on to raise money tax-free. But such an objection does not prevent business organisations from regularly lobbying the government to abolish CGT in key areas in a bid to stimulate investment and give additional incentives to talented staff. Their persistence paid off when the Chancellor confirmed a CGT exemption for companies disposing of substantial shareholdings in their main business or in their subsidiaries. Under the changes, which should encourage companies to restructure quickly and flexibly in response to new opportunities, the disposal of stakes of 10% or more in trading companies will not be taxable.

Restructuring incentives

This means that companies wishing to restructure for commercial reasons will be able to do so without being constrained by CGT. The changes are forecast to reduce the tax burden on business by £150m a year.The Chancellor has also eased CGT on the sale of other stocks in recent years in a bid to encourage employee share ownership and tempt talented managers to join fast-growing businesses. Enterprise Investment Scheme reinvestment relief allows CGT to be deferred when the proceeds of a sale are used to buy shares in certain small unquoted companies.

Inheritance tax

Inheritance tax (IHT) affects a growing number of people in the UK - mainly because IHT thresholds have not risen in line with house prices. Inheritance tax is a form of death duty and without some sound tax planning in advance you can saddle your nearest and dearest with it. IHT is paid by your executors, the people who manage your will after your death. The value of estates above the threshold (currently £285,000 for tax year 2006 to 2007) is taxed at 40%.When property prices rise strongly more people find their estates targeted by IHT - because the £285,000 threshold includes the value of your house - unless it is left to a UK-domiciled spouse.

There are ways of reducing your IHT liability. You can give things away in the seven years before you die - what you give away may be taxed at a reduced rate on a sliding scale. There are rules which mean you can give certain presents or assets to friends and relatives, if you follow the guidelines. Tax planning is something that many people don't like to mention to elderly relatives, yet the thought of the taxman grabbing assets might prompt more people to do so.