Fixing the disposal date before or after April 2008 to reduce your capital gains tax

The changes to the capital gains tax rules that are planned to apply from April 2008 will have a significant impact on anyone planning on selling any assets.

We we've seen in other articles there will be some people better off, and some worse off. Some examples include:

• Higher rate taxpayers selling a trading business (or shares in their trading company) that they've owned for at least 2 years will be worse off

• Higher rate taxpayers selling property that has been let to a trading company (or after April 2004 to a trading business) may be worse off

• Higher rate taxpayers with assets that they've owned for a long time may be worse off

• Basic rate taxpayers with capital gains within their basic rate bands will be worse off

• Anyone selling investment assets will be better off

• There's also the changes to the remittance rules. Any Non Doms selling overseas assets before April 2008 can claim the remittance basis and retain proceeds overseas to avoid UK CGT. After 6 April 2008 they'll need to pay the £30,000 annual tax charge.

The decision as to whether to sell before or after 5 April 2008 can therefore have a significant impact on the amount of capital gains tax you'll pay and many taxpayers will be looking to structure the disposal of assets to ensure it's taxed in the most beneficial tax year.

The key issue when looking at which tax years rules will apply is the date of disposal.

It is this that represents the transfer of the asset for CGT and if you want to maximise the benefit of the tax rules this is what you'll need to consider. In other words:

• If you're better off under the rules from April 2008 (eg selling investment assets) you should make sure the date of disposal is after 6 April 2008
• If you're better off under the current tax rules (eg selling your trading business) you should make sure the date of disposal is before 6 April 2008

When is the date of disposal

The date of disposal is the date that the 'beneficial interest' in an asset is transferred. In the case of property this is usually the date of the exchange of contracts, and not the later date of completion. From the exchange of contracts the risks and rewards of ownership are usually transferred to you (eg it is at this date that you need insurance to cover any risk of fire damage etc).

There are usually two possible methods of postponing a disposal: using conditional contracts and using options.

Conditional Contracts

There are two types of contract, unconditional and conditional.

The date of disposal for unconditional contracts is usually the date of exchange of contracts. As we've seen above beneficial ownership in the assets passes to the purchaser at this date.

By contrast, the date of disposal for a conditional contract is the date that the condition is satisfied. It is important to recognise that the condition must go the heart of the contract and as such there would need to be no transfer of liabilities until/unless the condition was satisfied.

Conditions can be either condition subsequent or conditions precedent.

Conditions subsequent do not give rise to a conditional contract and may require the parties to do various things before completion or may establish how the contract is to be performed. They do not prevent the contract from being binding with immediate effect. If they are not met the contract remains a binding contract but the vendor or purchaser may be able to sue for breach of contract.

In order to be a conditional contract the condition needs to be a 'condition precedent'.

A condition precedent is a condition that prevents the contract from coming into effect until a certain event takes place.

In order to be a condition precedent:

• The condition needs to be satisfied prior to the contract being 'completed', and
• It must not be within either party's direct power to bring it about.

One typical example of a conditional contract that is used in practice, is to make any disposal subject to a third party consent (eg planning permission being granted).

This was confirmed in the case of Hatt v Newman.

In this case an individual decided to sell some land. They exchanged contracts on 21 February 1995, and the completion date was 20 March 1995.

But completion of the contract was conditional upon planning permission being granted. Planning permission was given on 29 March 1995, and completion then took place on 6 April 1995. The court held that the contract was a conditional contract and the date of disposal for the sale of the property was 29 March 1995, when the condition was fulfilled

Options

Another way to delay the date of disposal would be to use options.

Options can be either call options, whereby the purchaser is entitled to call on the vendor to sell the asset, or put options in terms of which the vendor can require the purchaser to buy the asset.

By using options there is no contract to purchase the asset. The options give the purchaser the right to buy the asset, and the seller the right to sell.

This therefore allows the commercial requirement of a disposal to be satisfied (ie you can sell as you've found a willing buyer) and it ties them to the purchase/disposal. However there is no contract in place.

Options can therefore be used to delay the actual contract date, as the contract is not concluded until the option is satisfied.

Bringing forward a disposal

If you want to sell an asset and take advantage of the rules before April 2008 you need to fix the date of disposal before April 2008. This means ensuring the beneficial interest passes in the current tax year. If there's insufficient time to arrange a disposal before April 2008 you may be able to argue for an oral contract if you're selling assets that aren't land/property.

Oral contracts are still binding for many asset disposals the difficult is in establishing the evidence to support it. In practice you would also need written evidence (eg a signed letter etc) to show the necessary transfer of ownership.

You could of course ensure that the beneficial interest was transferred before April 2008 even if the disposal wasn't completed until after April 2008. For applying the tax rules the disposal would then be in the current tax year.

About the Author

He worked in Ernst & Youngs Entrepreneurial Services department for a number of years before setting up his own tax planning practice. He is now a full time tax author.

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