Capital Gains Tax (CGT) Reform May 2008
In October 2007 the government announced some major changes to capital gains tax for individuals and trustees for 2008/09. These include, for disposals and held over gains arising on or after 6 April 2008, the double whammy that neither taper relief nor indexation allowance are available (even if assets were held before this date). The chargeable gain is liable to tax at the new rate of 18% (subject to the deduction of allowable losses, any other reliefs and the annual exemption). Please note that there is no change in the treatment of capital gains tax within limited companies which will still be calculated using indexation relief.
What are the main changes?
Firstly, legislation will be introduced from 6th April 2008 will create a flat rate of CGT at 18%.
Secondly, a number of changes will be made for disposals made on or after 6 April 2008 to simplify the CGT regime, including:
- the withdrawal of taper relief;
- the withdrawal of indexation allowance; and
- simplification of the share identification rules.
After business leaders voiced their objections to the abolition of taper relief, the Chancellor introduced a new Entrepreneurs’ Relief (ER). ER may be available for disposals, reorganisations and relevant transactions taking place on or after 6 April 2008.
The main effects of this relief are:
- 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.
What will these changes mean for you?
This fact sheet contains two sections: -
1. Gains qualifying for entrepreneurs relief and capital gains.
2. All other gains.
The new relief is similar to the old Retirement Relief, which some of you may remember and which was phased out with the introduction of taper relief. The rules for Retirement Relief required an individual to have been in business for a number of years but the new rules are designed to be simpler:
- there will be no minimum age limit; and
- relief will be available where the relevant conditions are met for a period of one year.
What qualifies for relief?
The relief will apply to gains arising on the disposal of:
- the whole, or part, of a trading business that is carried on by the individual, either alone or in partnership;
- shares in a trading company, or holding company of a trading group, provided that the individual owns broadly a 5% shareholding and has been an officer or employee of the company;
- assets used by a business or a company which has ceased;
- assets used in a partnership or by a company but owned by an individual, if the assets disposed of are ‘associated’ with the withdrawal of the individual from participation in the partnership or the company.
A trading business includes professions but only includes a property business if it is a ‘furnished holiday lettings’ business. (NB unlike business taper relief commercial property only qualifies for ER if it is sold in connection with the disposal of a qualifying trade). Trading company will have the same meaning as currently applies for taper relief.
Similar rules operate where the trustees of a settlement make a disposal of business assets and there is an individual who is a qualifying beneficiary. There are however a number of specific conditions which need to be met to treat the individual as a qualifying beneficiary.
The relief available
ER will have to be claimed by the individual or, in the case of a disposal of trust business assets, jointly by the trustees and the qualifying beneficiary.
Where a claim is made, gains and losses of all relevant disposals are aggregated and any remaining ‘net gain’ reduced by 4/9ths, giving an effective rate of 10% (18% x 5/9ths). This rule applies to both individuals and trust gains in respect of qualifying beneficiaries. The maximum cumulative ‘net gain’ qualifying for the reduction cannot exceed £1m within a tax payers life time. If a tax payer has more than one qualifying asset and disposes one of these giving rise to a gain of £600,000, the amount of entrepreneurs relief available in the future is reduced to £400,000.
Transitional rules
A number of individuals have made gains prior to 6 April 2008 and have deferred the gain until after 5 April 2008. ER may be available when the deferred gain eventually becomes chargeable after 5 April 2008 if the original sale of shares in a trading company, or the sale of an unincorporated business, would have met the conditions for ER if ER had been available at the time of the original sale.
The deferred gains eligible for relief are where:
- shares in a trading company were disposed of in exchange for loan notes in another company which are Qualifying Corporate Bonds (QCBs)
- the gains made on shares in a trading company or on the disposal of an unincorporated business were reinvested in Enterprise Investment Scheme shares or Venture Capital Trust shares.
If an individual had shares in a trading company which were disposed of in exchange for loan notes in another company which are not QCBs, there may be ER on the disposal of the loan notes after 5 April 2008. However, the loan notes would need to be issued by a trading company in which the individual owns at least 5% of the voting rights in that company and the individual is an officer or employee of that company.
Care must be taken
The introduction of ER goes some way to mitigating the loss of taper and indexation but the Chancellor’s plan for a simple tax system has evaporated.
Considerable care is needed in planning to obtain the benefit of ER. For example, the disposal of a property used by an unincorporated business may not qualify if it is not related to the disposal of the whole, or part, of the business. The disposal of shares in a trading company may not get any ER if the company has ‘substantial’ non-trading activities at the time of the disposal of the shares.
CGT rates of tax
In the past individuals making capital gains would have treated those gains as the top slice of income. This meant that there were three rates of capital gains tax at 10%, 20%, and 40% depending on what tax band the income fell into.
For 2008/09 there will be a single rate of CGT set at 18%, which will apply to individuals, trustees and personal representatives.
Every tax year individuals are allowed to make gains of up to the annual exemption without paying any CGT. The annual exemption for 2008/09 is £9,600.
The withdrawal of taper relief
Taper relief was introduced for disposals on or after 6 April 1998 and could have reduced the amount of the gain chargeable to CGT. The amount of relief available depended on whether the asset was classed as a business or non-business asset and, also, on the length of time an asset has been held since 1998. The reduction for business asset taper was as high as 75% of the gain, with a 40% maximum available for non-business assets.
For any gains arising on or after 6 April 2008 and any held over gains coming into charge on or after that date, taper relief will no longer be available. The chargeable gain will be liable to tax at 18%, after deducting allowable losses, any other reliefs and the annual exemption.
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 5 April 1998. Where an asset was held at 6 April 1998 and is disposed of after that date, any gain on the disposal may have been eligible for both indexation and taper relief.
For disposals on or after 6 April 2008 indexation allowance will no longer be available.
The only time indexation relief may form part of a calculation is where an asset was transferred between a married couple that was already had some indexation relief available at the date of transfer.
Simplification of the share identification rules
The previous rules for the identification of shares and securities for CGT purposes required a complex order of identification, which was dependent upon the dates when the assets were acquired. Shares of the same company and same class were treated as if the last shares acquired since 5 April 1998 were disposed of first unless the shares were disposed on the acquisition date or within 30 days of that date.
Due to the changes to taper relief and indexation allowance, all shares of the same class in the same company will be treated as forming a single asset from 6 April 2008, regardless of when they were originally acquired. However, ‘same day’ and ‘30 day’ anti-avoidance rules will remain.
In general you will be better off under the new system (if your shares are non-business assets).
Normal planning rules continue to apply regarding the utilisation of your annual exemption each year.
Other more complex areas
Capital gains can arise in many other situations. Some of these, such as gains on Enterprise Investment Scheme and Venture Capital Trust shares, and rolled over gains on share for share or share for loan note exchanges, can be complex. Please talk to us before making any decisions.
Things that will not change
And finally, many existing reliefs will continue to be available, such as:
- private residence relief;
- business asset roll-over relief, which enables the gain on a business asset to be deferred until a point in the future;
- business asset gift relief, which allows the gain on business assets that are given away to be held over until the assets are disposed of by the donee; and
- any unused allowable losses from previous years, which can be brought forward in order to reduce any gains.
Download the Capital Gains Tax Reform fact sheet as a pdf
If you have any queries or require professional advice then please do not hesitate to contact us.
