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Shelters from the CGT storm

Schemes set up before November 25 should be safe as truly retrospective legislation is extremely rare. The major area for IFAs to consider is capital gains tax reinvestment relief.

Have any of your clients realised a capital gain during the last three years, even if they have already paid the tax, or are about to realise a gain during the next 12 months?

If so, there is an opportunity for them to reinvest their gain into a qualifying investment for a minimum of only three years, after which time they can literally invest their money where they want (within the structure) and still defer the CGT indefinitely or to a period of time that is suit able to their own personal requirements.

After the initial three-year period, they can invest their money on deposit, in the stockmarket, in property or literally anywhere. They could even reverse in another asset that they own, take out the cash from the scheme, that is, swop an asset of theirs for the original cash invested and still defer the CGT. indefinitely. The options currently are almost limitless if you know what you are doing.

Death is a great way of avoiding tax, although not highly recommended. Not only is CGT wiped off on death but it is also possible to avoid IHT after only two years, not seven as normal, so long as the investment remains qualifying at the time of death.

This is because business property relief is currently 100 per cent on qualify ing shares which may or may not be altered in the forthcoming Budget. It was set at 50 per cent only a couple of years ago.

Opportunities are likely to be much less flexible after the Green Budget. I believe it is likely that the three-year minimum qualifying period will be extended and that heavily asset-backed schemes, such as those investing in property, will be curtailed. Long-term gains will probably not be hit too hard but those made over a short period of time will be more heavily taxed.

Current investment schemes

A number of schemes to take advantage of CGT reinvestment relief are currently available. The three main ones are:

Property-based schemes, which can give up to 100 per cent asset backing, therefore greatly reducing the risk. Even the trading risks can be minimised in the event of a market downturn.

Forestry, once again asset-backed, is also available.

The Alternative Investment Market is higher-risk but with good potential upside although it is important to check out the track record of the managers.

Venture capital trusts

For those of you who have not yet looked at VCTs, I would encourage you to do so.

Not only do VCTs carry all the tax advantages of a Pep (tax-free dividends and tax-free capital growth) but you also get 20 per cent initial income tax relief, subject to an investor having sufficient taxable income.

It is also possible to reinvest a capital gain into a VCT giving up to 60 per cent tax relief/deferment in total.

The investment limit is also greatly increased to £100,000 a year with a five-year minimum term.

VCTs have been with us for two years and have generated around £350m of new business but, as with all other tax shelter schemes, are now under review. Protected VCTs made a substantial part of their investment in the form of guaranteed loans but have bitten the dust.

Asset-backed VCTs make the bulk of their investments in companies carrying on property-based trades. Investment in such companies often carries a lower level of risk because of the high value of the companies&#39 assets.

It is almost certain that asset-backed VCTs will not survive. But the traditional VCT should be OK in one form or another.

Opportunities for IFAs

As fewer accountants and solicitors are involved in advising and arranging tax shelter schemes, there is a great opportunity for IFAs to assist clients, as they are usually the first to know when a large asset such as a business, is sold.

While advisers will chase clients for life and pensions, very few do so for tax shelter business, yet there is probably as much, if not more, need to do so.

If you have not already reviewed your clients&#39 tax planning requirements, I would greatly urge you to do so without delay or at the very least notify your clients of the probable pending changes.


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