New Capital Gains Tax regime
Story added: 24/02/2008
Draft legislation to simplify Capital Gains Tax (CGT) was published on 24 January 2008.
The new regime is expected to take effect on 6 April 2008 and creates some of the most significant changes to the CGT regime for a decade. However, these are currently still proposals and will not become law until Royal Assent is received in the summer. We have outlined below the main changes and how they may apply to you.
New single rate of CGT of 18%
With effect from 6 April 2008, a new single CGT rate of 18% will be introduced. This will apply to individuals, trustees and personal representatives but not companies. The new rate applies to all assets subject to CGT and will apply to both basic rate and higher rate taxpayers. The annual exempt amount (currently £9,200) will remain.
Abolition of indexation allowance, taper relief, simplification of share identification rules and March 1982 holdings
From 6 April 2008, indexation (which provided an allowance for inflation up until April 1998) and taper relief (which potentially reduces gains based on length of ownership post April 1998) will no longer be available. In addition, the complex share identification rules that currently determine which shares are being disposed of for CGT purposes are being simplified.
Also, gains on assets held since 31 March 1982 will be based on their market value at that date. Currently, it is possible to compare the March 1982 value to the actual cost and pay CGT on the calculation that gives the lowest gain. The current rules will continue to apply for all disposals until 5 April 2008.
Although the draft legislation has not yet been published, the Chancellor recently announced a new 'entrepreneurs relief' that appears to allow the first £1 million of gains on certain types of assets to be charged at an effective CGT rate of 10%, from 6 April 2008.
An individual will be able to make claims for such relief on more than one occasion, but only up to a lifetime total of £1 million of gains. Any gains in excess of this will be charged at the new rate of 18%. The definition of an asset that will qualify for the relief is more restrictive than under the current definition of a business asset but to qualify for the new relief, assets only need to be held for a year.
How this may affect you
The new regime could have both positive and negative effects. Full business asset taper relief (which can provide for an effective rate of 10% for higher rate taxpayers) will no longer be available. However, some assets which currently qualify for business asset taper relief should be able to benefit from the new 'entrepreneurs relief' with an effective CGT rate of 10% on the first £1 million of gains.
For assets only attracting non-business asset taper relief, the introduction of a flat rate of 18% for gains on all assets sold from 6 April 2008 could be good news, as the rate of tax could fall from between 40% and 24%, to 18%. Careful consideration will need to be given where assets have been held long-term, as those acquired before April 1998 could also have accrued indexation relief, the benefit of which will no longer be available for disposals on or after 6 April 2008.
Although the proposals and draft legislation could be modified before becoming law, you should consider your own personal circumstances and whether any action should be taken prior to 6 April 2008. Please contact us before contemplating any transaction to ensure that your tax position is optimised.