How to save on capital gains - and get a yacht into the bargain

published 31 October 2005

If you are having difficulty convincing your bank manager that buying a big boat is worthwhile, then do not despair, says the Schmidt Report. Where an individual or a company makes a capital gain from selling a "trading asset" (one used for the purposes of a trade, profession or vocation), the capital gains tax (CGT) rules allow that gain to be deferred, perhaps indefinitely, if the trading asset is replaced by another, within a rollover period of three years.

Investment properties or items of trading stock do not count, but if your firm has just sold its factory or you've sold off the goodwill of a business, it might be worth investing the proceeds in a boat or a plane. Say you have just sold your company. Included in the sale valued at £600,000 was a plant acquired some years ago for £100,000. £500,000 is now a taxable gain, meaning a bill of £150,000. But if at this point you decide to buy a yacht for £600,000 (coincidentally) that can be chartered out on a profitable basis, tax can be deferred.

This leasing or chartering to others is crucial, as the only criterion is that the asset should be a bona fide trade. Any use by you and your family must be incidental to the trade. That said, "it is surprising how much use can qualify as incidental". l According to economic experts, tax rises are inevitable if Labour wins the next election, says the Daily Mail. Think tank Ernst & Young Item Club, which bases its forecasts on the Treasury model, said that taxes will have to rise by the equivalent of 3p on income tax to close a £10bn black hole created by Gordon Brown, given his promises to increase funding for schools, hospitals and the like. Brown's spending is too high and leading to "indiscriminate growth", says the Item Club's chief economic adviser. It looks like he is engineering "a classic pre-election boom".