In last month’s enews
we reported on the shock announcement in the
Pre- Budget Report that capital gains tax taper
relief and indexation allowance would be scrapped
for disposals on or after 6 April 2008. Since
then business leaders have been making representations
to the Chancellor, Alistair Darling, to change
his mind or to delay the introduction of the
proposals which have significant implications
for many taxpayers.
There have been rumours of the introduction
of some form of retirement relief, with the
figure of £100,000 being mentioned by
several sources. Unfortunately as yet there
are no concrete proposals. Chancellor Alistair
Darling, speaking at the CBI conference on
27 November 2007, said:
“Simplification of the tax system is
important because complexity brings increased
costs.
I know that my proposals to introduce a single
rate of capital gains tax have been controversial.
That was inevitable.
We are working with the CBI and other business
organisations to listen to what you have to
say. I expect to publish final proposals in
the next three weeks.”
What were the Pre-Budget proposals?
The changes announced in the Pre-Budget Report
were that taper relief for capital gains
tax (CGT) will be abolished for disposals
on or after 6 April 2008. HMRC have issued
several examples of how they envisage the
rules working. At the same time as abolishing
taper relief the government propose to change
the rate of CGT to a flat rate of 18%.
Taper relief
Taper relief was introduced in 1998 and can
significantly reduce the amount of any gain
chargeable to CGT by as much as 75%. The
percentage of the relief available depends
on whether the asset is classed as a ‘business’ or ‘non-business’ asset
and also the period of ownership of the asset
since 1998.
To give a straightforward example, if today
you sold some shares that you have owned for
two years that have always been a business
asset, then you would pay tax on the chargeable
gain (basically, proceeds less cost less 75%
taper relief). The remaining gain would be
taxed at your top rate of tax of say 40%.
If you sell the same shares on or after 6
April 2008 taper relief will no longer be available
to reduce the amount of the chargeable gain.
The rate of tax applicable to chargeable gains
will be changed from 6 April 2008 to 18%.
Inflation allowance
Another complication in current CGT computations
is that if you have assets which you acquired
before April 1998 you are currently allowed
to include an element of inflation in your
CGT computation. This inflation allowance,
known as indexation, increases the cost of
your asset and therefore reduces the amount
of the chargeable gain for periods of ownership
prior to April 1998. This relief will also
no longer be available in computations for
disposals on or after 6 April 2008.
These rules will generally increase the amount
of tax payable by individuals who own assets
that currently qualify for full business asset
taper relief but everyone has different costs
and entitlements to reliefs, so it is difficult
to speak in generalities.
If the government does introduce a form of
retirement relief then it may be beneficial
to retain business assets and dispose of them
on or after 6 April 2008 depending on the amount
of the relief, the conditions which have to
be met and how it is calculated.
We will continue to keep you informed of developments.
However if you have any concerns please do
get in touch.
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