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Gift assets now to make CGT savings - Citywire

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The following article was written by Lorna Bourke and published by Citywire on the 28th of March 2008. Thank you Lorna and Citywire!

Investors who want to minimise their tax liabilities under the new Capital Gains Tax regime should consider transferring assets, such as shares or collective investments like unit and investment trusts, to their husband or wife before 5 April 2008.

By gifting assets, it is possible to lock-in the accrued benefits of indexation and save substantial amounts of money.

timetotrade has produced a Capital Gains Tax calculator which helps investors reduce their tax bill by working out how much indexation allowance they could lose if they don’t act before the tax deadline. The tool can be accessed at www.timetotrade.eu.

‘Many people stand to lose substantial indexation allowance benefits under the new Capital Gains Tax regime,’ warns Dary McGovern, MD of timetotrade. ‘If you act quickly it is still possible to retain those benefits. In addition, gifts to your spouse or civil partner don’t attract Stamp Duty at this time, so it really is a win-win opportunity - but you need to act quickly.’

It works like this. If you bought £10,000 worth of shares in April 1982, your deemed base cost after indexation is currently approximately £20,000. If you were to dispose of the shares after 6 April 2008 - say, for example, that they are sold for £35,000 - you will lose your indexation allowance, the base cost will return to £10,000 and you will be looking at paying tax on a capital gain of £25,000.

If however you transfer the asset to your spouse on a tax free no gain/no loss basis before 5 April 2008, the base cost for tax purposes will be deemed to be £20,000 (the indexed acquisition cost of £10,000) and so you would be looking at tax on a lesser gain of £15,000 instead.

By transferring the asset the accrued indexation allowance is preserved, even after April this year when indexation relief is abolished. In this example you could reduce your Capital Gains Tax bill on a future disposal by as much as £1,800, simply by gifting the shares to your husband or wife.

Indexation allowance was introduced in 1982 to offset the effects of high inflation, so that individuals didn’t have to pay Capital Gains Tax on purely inflationary gains. For investors who currently own assets purchased between April 1982 and April 1998, indexation allowance effectively increases the deemed purchase cost for Capital Gains Tax purposes by the rate of inflation since acquisition.

The Inland Revenue has confirmed that, on a no gain/no loss transfer to your spouse or civil partner, ‘indexation allowance will not be stripped out when the person who acquires the asset under a no gain/no loss transfer disposes of it after 5 April 2008. For example, in the case of an inter-spousal transfer, indexation allowance will continue to be included, where applicable, in arriving at the allowable cost to the transferee spouse.’

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