Capital Gains Tax (CGT) reform
Date of Issue: 7th February 2008
The main changes to CGT were announced in the Pre Budget Report last year, but have since been qualified following pressure from the business community.
The proposals, outlined below, are due to come into effect from April 2008.
What are the main changes?
- Creation of a new single flat rate of CGT at 18% for 2008/09
- The withdrawal of taper relief
Currently gains are treated as the top slice of income, which often means a 40% tax charge. However if business assets are sold the gain may be reduced by up to 75% due to business asset taper relief, producing an effective CGT rate of 10%. The abolition of taper relief results in the flat rate of 18% CGT applying to disposals after 6th April 2008.
- The withdrawal of taper relief
The first £1m of gains qualifying for relief will be charged at an effective rate of 10%. Gains in excess of £1m will be charged at 18%. An individual will be able to make more than one claim for relief, up to a lifetime total of £1m of gains qualifying for relief. The relief applies to a narrower range of assets than those that qualified for business asset taper relief. It only applies to disposals of businesses or shareholdings of at least 5% in companies where the individual is an officer or employee.
- It excludes
- Assets used in a business that do not constitute a business by themselves, e.g. land that becomes surplus to business requirements
- Most AIM shares
- Shares in quoted companies held by employees
- Commercial properties let to third parties running small businesses
- The withdrawal of indexation allowance
Indexation allowance was, for individuals and trustees, the precursor to taper relief and gave relief for the effect of inflation on the costs incurred on acquiring and improving assets. Indexation was frozen as at 5th April 1998.
- Simplification of the share identification rules
All shares of the same class in the same company will be treated as forming a single asset from 6th April 2008, regardless of when they were originally acquired. However, “same day” and “30 day” anti-avoidance rules will remain.
What are the main changes?
Clearly the new system will provide winners and losers. Generally the winners will be those with non-business assets such as let residential properties. Losers are likely to be those with business assets worth in excess of £1m, assets with substantial indexation allowance or assets that qualified as business for taper relief purposes but do not qualify for entrepreneurs relief (see above).
For potential losers there are a number of ways to reduce the impact of the new rules. However, any action must be taken before 6 April 2008.
Bates Weston recommends that you contact your business advisors to discuss how any of these changes apply to your own circumstances.
For further details, please contact:
Bridget Charlton, Marketing Manager
Email: bridgetc@batesweston.co.uk
or telephone 01332 365855
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