Pre-Budget Report - 9 October 2007
1. Who is likely to be affected?
The proposals cover individuals, trustees and personal representatives recording a gain which is chargeable to Capital Gains Tax (“CGT”). It should be noted that companies, that are liable to corporation tax in respect of their chargeable gains, are not affected by any of the proposed changes.
2. General description of the reforming measures
Legislation will be introduced within the Finance Bill 2008 to give effect to a new flat rate charge to CGT at 18%. A number of concurrent changes to simplify the CGT regime will be made including:
· The withdrawal of taper relief.
· The withdrawal of indexation allowance.
· Alteration in the rules affecting adoption of the base date of 31 March 1982 (where assets may be held prior to that date).
· Simplification of the share identification rules.
3. Annual exempt amount (“AEA”)
The annual exemption will remain which, for 2007/2008, is £9,200 for individuals and personal representatives; trustees, in general, have an annual allowance currently of £4,600. The AEA for 2008/2009 will not be announced until Budget Day 2008.
4. Operative date
The reforming measures will effect disposals made on or after 6 April 2008. It is important to note that the current CGT rules continue to apply for disposals made up to 5 April 2008.
5. What are the current rates of CGT?
Under section 4 of Taxation & Chargeable Gains Act, 1992 an individual is chargeable to CGT at the rates applicable for income tax on savings income – viz, 10%, 20% or 40% – individuals net chargeable gains (after deduction for allowable losses, taper relief, indexation, relevant expenditure and the annual exemption) are then applied to the top slice of an individuals income.
It should be noted that most trustees and all personal representatives are chargeable at the CGT rate applicable to trusts (40% for 2007/2008).
6. What is the intended reform in rate of CGT?
For tax year 2008/2009, there will be a single rate of CGT set at 18%. This rate will apply to individuals, trustees and personal representatives. No further interaction will apply to the income tax rates.
7. What are the implications regarding taper relief?
Taper relief was introduced for disposals on or after 6 April 1998 which reduced the amount of the gain chargeable to CGT (and hence reduce the effective rate of tax payable on the gain). There are two heads to this relief:
a) Relief is dependent on the length of time an asset has been held since 6 April 1998.
b) Whether the asset is classified as a business or non-business asset.
The regime for business assets has been particularly favourable and currently, only after two complete years, the maximum relief of 25% (against a chargeable gain) apply which for a higher rate tax payer (40%) means an effective rate of just 10%.
The regime for non-business assets is less favourable. Three complete years of ownership have to be in place to qualify for the first 5% reduction against a chargeable gain and, after 10 qualifying years of ownership, the maximum relief of 60% (against the chargeable gain) would apply giving an effective rate of 24% for higher rate tax payers.
8. What is the intended reform affecting taper relief?
Disposals on or after 6 April 2008 will no longer qualify for taper relief and even if the assets were held before this date; computation of the chargeable gain will exclude any element of taper relief (allowable losses, incidental expenses in both acquisition and disposal, will remain to be deducted as before and the annual allowance will apply).
9. Indexation allowance
Indexation allowance was introduced as a mandatory relief with effect from 31 March 1982 and frozen for CGT purposes as at 6 April 1998 when taper relief was introduced. The current position is that where an asset was held on 6 April 1998 and is disposed of after that date, the gain on disposal may be eligible for both indexation and taper relief. Whilst abolished when taper relief was introduced, indexation allowance remained available to life companies.
10. What will happen to indexation allowance following 6 April 2008?
For disposals on or after 6 April 2008, indexation allowance will be excluded from any computations of chargeable gains arising. This particular change will only affect assets that were acquired prior to 6 April 1998.
11. What is the position where assets were held prior to 31 March 1982?
The current position is that where assets were held prior to 31 March 1982, the tax payer had the option to calculate the gain (or loss) calculated by reference to the original acquisition cost compared to treating the base point as at 31 March 1982. This test (known as the “kink test”) is to be abolished with effect from 6 April 2008 which means that all assets held on or prior to 31 March 1982 will be deemed to have had a cost acquisition equivalent to their market value on that date.
12. What other CGT relief will continue to be available post 6 April 2008?
· Private residence relief will continue to be available for principal private residence.
· Business asset rollover relief continues to be available.
· Rollover relief enables the CGT payable on the gain on the chargeable asset to be deferred until a point in the future. Taper relief is not given on the rolled over gain under the current rules.
· Business asset gift hold over relief also continues to apply. This relief allows CGT on business assets that are given away to be held over until the assets are disposed of by the donee.
· Any unused allowable losses from past years will continue to be allowed to be brought forward in order to reduce any future gains.
Andrew Murdoch
30 October 2007
