What is happening to CGT?
The big surprise in the Pre-Budget Report was the new 18% rate of capital gains tax (CGT) and the removal of taper relief. Nearly ten years ago, Gordon Brown invented taper relief but his successor has abolished it for gains arising on or after 6 April 2008.
If you hold business assets, including unquoted shares and land and buildings used by a trade, for at least two years, the capital gain which arises on their sale may be discounted by 75%. That works out at just 10% tax for a higher rate taxpayer or 5% for a basic rate taxpayer.
Indexation allowance for individuals and trustees (but not for companies) is also to be abolished from 6 April 2008. This will simplify capital gains calculations, but it does not hide the fact that the potential 10% tax rate payable on the sale of business assets will jump to 18% from 6 April 2008.
If you are planning to sell your business you may save at least 8% tax if you sell before 6 April 2008. The exact calculation of the tax due on the sale will depend on how the business asset has been owned or how the property has been used throughout the last ten years, so ask us to check the potential tax bill for you.
The new flat rate of CGT will be good news for most people selling a non-business asset, such as a buy to let property, or quoted shares. At present the maximum a gain can be reduced by taper relief on non-business assets is 40%, which works out at 24% for higher rate taxpayers and 12% for basic rate taxpayers. If you expect to make a gain on a non-business property, it may be better to sell on or after 6 April 2008 to save at least 6% on your tax rate, possibly more.
However if you acquired investment properties well before 1998 you need to consider the effect of the loss of indexation allowance from 6 April 2008. Its effect is to uplift the cost of the asset to reflect general inflation from the date of acquisition to April 1998. An asset purchased in September 1988, for example, would qualify for a 50% uplift in cost if sold before April 2008. So if you have an investment property with a relatively high base cost, indexation allowance may reduce your effective rate to below the 18% rate.
The annual capital gains exemption (currently £9,200) will be retained as will other capital gains reliefs such as hold-over, roll-over and the deferral of gains using the Enterprise Investment Scheme. So when you make relatively small gains in a single tax year they will normally be tax free. However, this allowance is not transferable between spouses, so putting property into joint names before a sale can still save tax. Since his initial announcement the Chancellor has announced entrepreneurs' relief. The first £1m of qualifying gains will be taxed at 10% and any excess at 18%.
Please contact us on +44 (0)20 8363 5502 if you have any questions.
