The Pre-Budget speech also included the shock
announcement that taper relief for capital gains
tax (CGT) will be abolished from 6 April 2008.
This announcement took everyone by surprise and
it is still unclear in some circumstances how
these rules will be applied. There is also much
speculation that the proposed changes may not
be implemented or may be deferred.
HMRC have however issued several examples
of how they envisage the rules working. At
the same time as abolishing taper relief the
government proposed to change rate of CGT to
a flat rate of 18%. Higher rate taxpayers currently
pay CGT at 40%.
Taper relief
Taper relief was introduced in 1998 and can
significantly reduce the amount of 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 (when the rules were introduced).
To give a straightforward example if 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 (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 taxable gain. The
rate of tax applicable to taxable gains will
be changed from 6 April 2008 to 18%.
The Chancellor confirmed that the annual exemption,
which for the current tax year is £9,200,
will continue to be available in the next tax
year. The amount of the exemption has not yet
been announced.
Inflation allowance
Another complication in current capital gains
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 capital gains tax computation. This
inflation allowance, known as indexation, increases
the cost of your asset and therefore reduces
the amount of the taxable gain. This relief
will also no longer be available in computations
from 6 April 2008.
Will I have more tax to pay?
These rules will generally increase the amount
of tax payable by individuals who own assets
that currently qualify for full business asset
taper relief. There are many conditions that
have to apply for assets to qualify, and the
definition of a business asset has changed
since the introduction of the rules in 1998.
If you are planning to sell assets in the
near future please do get in touch so we can
advise you.
John Cridland, Deputy Director-General of
the CBI, had this to say about the change in
the rules:
“Changing the capital gains tax rate
to a flat rate of 18% will adversely affect
the balance between risk and reward, both for
entrepreneurs and for the UK's vital private
equity industry. This move is disappointing
and may lead to a reduction in investment in
start-up and growing businesses.”
Internet link:
HMRC
notice and CBI
statement |
