Capital Gains Tax 2008 : Explanatory Note

21 February 2008

In his Pre-Budget report last October the Chancellor announced changes to the Capital Gains Tax legislation which is due to come into effect for disposals on or after 6 April 2008.

The draft legislation has only recently been published, and it does not include the new Entrepreneurs’ Relief, announced at the beginning of this month. Many taxpayers will find they have to take decisions in a very short space of time without the comfort of final legislation.

The aim of this note is to help you understand the basics of the new rules in order to evaluate whether any action should be taken before the end of this tax year. You will find a glossary of terms at the end.

Key Changes to Capital Gains Tax in 2008

• The new rules will apply to individuals, personal representatives and trustees (not companies)
• The rate of CGT will no longer be referable to the individual taxpayer’s rate of income tax (or 40% for trustees). A single rate of 18% will apply
• Taper Relief and Indexation are to be abolished. This includes any indexation or taper relief that has been built up to 5 April 2008, including any indexation which has been ‘banked’ on a holdover claim
• A new Entrepreneurs’ Relief will apply for the disposal of a limited category of business assets
• For assets held prior to 31 March 1982, the 31 March 1982 value will have to be used (currently you can choose this value or the earlier base cost value, whichever gives the lower gain)

Entrepreneurs’ Relief

This new relief was announced only recently and we are waiting for draft legislation. It seems to be modelled in part on the old retirement relief.

It will apply an effective rate of 10% CGT for gains up to a lifetime limit of £1m capital gains on certain business assets. The relief is to be calculated by working out the gain, reducing it by 4/9ths and taxing the balance at 10%. For example on a sale giving rise to a gain of £900,000 before the relief, the relief will apply to £400,000 of the gain and £500,000 (before any other allowances and the annual exemption) will be liable to 10% CGT.

Disposals which are expected to qualify are those of trading businesses; disposals of shares in trading companies where the investor has a ‘material stake’ in a company (an employee or officer of the company who is able to exercise at least 5% of the voting rights); disposals of furnished holiday lets.

Trustees are likely to benefit where an individual beneficiary with an interest in possession is involved in carrying on the business.

The lifetime limit could be reviewed, which means that it could be revised up or down. It is thought that this new relief will give a limited advantage to taxpayers.

What Stays

• The annual exemption
• Capital losses can still be carried forward to offset against gains in a future tax year
• Principal Private Residence relief
• Other reliefs such as asset roll over relief, Enterprise Investment Scheme and Venture Capital Trust relief

Who is likely to be affected by changes in Capital Gains Tax?

• Participants of share schemes who do not qualify for Entrepreneurs’ Relief and whose gains are likely to exceed their annual exemption
• Long-term holders of non-business and business assets who have significant built up indexation and taper relief meaning that the effective rate of tax is less than 18% – for example farmers, owners of second homes (including foreign property), buy-to-let investors
• Holders of business assets – the application of taper relief on an asset held for more than 2 years means that the current effective rate of tax for a higher rate taxpayer is 10% (or less if indexation is also available)
• Anyone who currently benefits from an effective rate of less than 18% CGT – for example holders of business assets which will not qualify for Entrepreneurs’ Relief (or who will but will exceed the lifetime cap)
• A spouse/civil partner who received an asset from his/her spouse/civil partner who had owned the asset prior to 31 March 1982 – the wording of the draft legislation says that the base cost will be the 31 March 1982 value not the indexed base cost
• Short-term holders of non-business assets may benefit from a reduced tax rate after 6 April 2008 – for example property owners who do not have significant built up indexation or taper relief and whose effective rate of tax is more than 18%

What can you do about Capital Gains Tax before 6 April 2008?

• The first thing to do is check whether your tax bill on a disposal is likely to be higher or lower under the new rules. If you are not contemplating an early disposal, something could still be done now to prevent a higher tax bill in years to come, but keeping the asset in the family
• If you can ‘bank’ any indexation or taper relief now, will the tax bill be lower? If so, consider planning opportunities before 6 April 2008
• Planning opportunities might help plan for other taxes too, for example inheritance tax
• If you trigger a CGT bill now, you might be able to pay the tax by instalments. At worse, the tax is payable by 31 January 2009
• You might be able to ‘hedge your bets’ by entering into a contract for sale (the date of disposal) but delaying the decision whether or not to complete until after 6 April 2008
• If you do not want to sell to a third party (or you cannot find a buyer in time) you could sell or gift the asset to a family trust, thereby triggering a disposal but keeping the asset in the family

Glossary of Terms about Capital Gains Tax.

Chargeable asset: 

All assets wherever located in the world unless they are exempt from CGT. The most common chargeable assets are land and property, shareholdings, chattels and proceeds from insurance claims.

Chargeable disposal: 

This includes the sale or gift of the whole or part of a chargeable asset, the loss or destruction of a chargeable asset.

Chargeable gain:

The net increase in the value of the asset during the period of ownership after deducting all available reliefs and exemptions.

Indexation Allowance: 

Starting in March 1982 it is an allowance for inflation for an asset owned before April 1998. It helps reduce the chargeable gain.

Taper Relief: 

A relief available on assets held since April 1998. The longer you have held the asset the bigger the percentage of the gain which is not taxable.

Business asset: 

The definition has changed over the years but currently includes all unlisted shareholdings (including AIM shares), employee shareholdings in quoted trading companies or where the shareholder can exercise 5% or more of the voting rights, shares in a non-trading company where the shareholder is an employee or officer and has a less than 10% interest, or an asset used in a trade, partnership or his company.

Non-Business asset: 

An asset which does not qualify as a business asset.

Annual Exemption: 

An annual amount which can be deducted from the chargeable gain before CGT is calculated. For 2007/2008 the annual exemption is £9,200 for individuals.

Principal Private Residence relief: 

Relief available on the disposal of a property that was your only or main residence, provide certain conditions are met.

Furnished holiday let: 

The commercial letting of a furnished property where certain conditions are met.

For more information contact Sarah Bogard
 

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