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Law Update on Capital Gains Tax Following Pre-Budget Report October 2007

01 November 2007

In his Pre-Budget Report in October, the Chancellor announced changes to the taxation of capital gains, to take effect next year. They will affect all individuals, trustees and personal representatives who sell or give away assets such as shares and property, or receive money from an asset (for example compensation or insurance payments).

A company’s liability to corporation tax on capital gains is unaffected.

The main changes, which apply from 6 April 2008, are that all capital gains will be taxed at a single rate of 18%, and taper relief and indexation allowance are to be abolished.

The loss of these two very valuable reliefs is likely to have most impact on higher rate taxpayers holding business assets for at least two years, including shareholdings in private companies, holders of AIM shares, and those owning assets used in a trading business (including farmers). Currently, their effective rate of CGT could be as low as 10% (sometimes lower), whereas after 6 April 2008 they could suffer as much as an 80% increase in their tax bill.

The new rules could also make it worse for those basic rate taxpayers who would have had an effective rate of CGT of less than 18%.

Some people will be better off under the new rules, particularly those who have recently acquired non-business assets.

If you are contemplating a sale or gift of an asset in the near future you should consider whether you would be better off making the disposal before or after 6 April 2008. This will be particularly important in respect of business assets, but also assets with built up indexation allowance and taper relief. You may be able to carry out some planning now to improve the tax position in the future.

Other changes announced:-

  • All assets held on 31 March 1982 will be deemed to have had a cost equivalent to their market value on that date, rather than being able to use the actual acquisition cost; and
  • The complicated rules for taxing the disposal of shares, when holdings in the same company have been acquired at different times, will also change.

Some reliefs are untouched, including only or main residence relief, and rollover relief on a disposal of business assets.

We are yet to see the draft legislation, but while we wait you should seek tax advice to understand how your tax bill may be affected.

For more information please contact Sarah Bogard, Associate & Chartered Tax Adviser.

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