The good, the bad and the not so ugly

PUBLISHED: 16:36 07 July 2009 | UPDATED: 15:13 20 February 2013

The chancellor Alistair Darling can't always make popular decisions

The chancellor Alistair Darling can't always make popular decisions

You win some, you lose some. Simon Michael looks at the changes in Capital Gains Tax

You win some, you lose some. Simon Michael looks at the changes in Capital Gains Tax

The reform of capital gains tax (CGT) was first announced in last October's Pre-Budget Report. It immediately provoked considerable controversy and has since been subject to one major revision, the introduction of entrepreneurs' relief. Although the Chancellor was under pressure to make further changes and delay the implementation date, he has not done so. The structure for 2008/09 is thus:
• Taper relief and indexation allowance will be abolished.

• The individual's annual capital gains tax exemption will be £9,600 and for trustees generally up to £4,800.

• Gains for individuals and trustees above their annual exemption will be subject to a flat tax rate of 18per cent.

• Entrepreneurs' relief will reduce to 10 per cent the effective rate of CGT on disposal of certain business assets owned for at least one year. The scope of this new relief is narrower than the current business assets taper relief. Unlike its predecessor, the entrepreneurs' relief will be subject to a lifetime limit on qualifying gains, initially set at £1,000,000.

• There are no changes to the taxation of capital gains made within companies, other than those stemming from the revised corporation tax rates.

The move to an 18 per cent flat rate will create winners and losers.

Winners

Higher rate taxpaying investors
At present, once your annual exemption is exceeded, the minimum effective tax rate you pay on ordinary investment gains is 24 per cent after 10 years' taper relief, while if you hold investments for less than three years, the full 40 per cent rate applies because there is no taper relief. From 2008/09 the only tax rate will be 18 per cent - which means more than a halving of your potential tax bill in some instances.

Second home and buy-to-let investors
Residential property is a 'lumpy' investment and gains can often fall into higher rate tax, even if you would otherwise be a basic rate taxpayer. As residential property does not normally qualify for business assets taper relief, tax on gains will often be at 24 per cent -40%. From 6 April 2008 this will fall to 18 per cent, a fact which is expected to encourage some buy-to-let landlords worried about the housing market to take their profits and quit the sector.

Trustees
The trust annual exemption is generally no more than half the individual exemption and may be as small as 10 per cent of the individual exemption. Thereafter trustees are currently subject to tax at 40 per cent on gains (adjusted for taper relief). The advent of a flat 18 per cent rate will allow many trustees to realise 'trapped' capital gains which would have attracted unacceptably large tax bills under today's regime.

Losers
Farmers
The abolition of indexation allowance hits all those who have held assets for a long period of time. The maximum indexation allowance for assets held at March 1982 is 104.7 per cent of the base cost. In most cases indexation allowance is small beer because of subsequent gains, but where an asset has grown in value only slowly over a long term - such as farmland - the loss of indexation allowance can make a very significant difference to the amount of gain exposed to tax.

Business property owners
Under today's rules, your commercial property gains normally qualify for business assets taper relief if the property is occupied by an unlisted company or unincorporated business, even if you are not involved in the business. However, entrepreneurs' relief will not apply in such circumstances and, even if you are involved with the business, there will be restrictions, e.g. the property disposal must be associated with a business disposal.

Employee shareholders
As a general rule, if you hold shares in your employer - whether the shares are listed or not - they currently qualify for business assets taper relief, reducing your maximum effective CGT rate to 10 per cent after two years' ownership. You will face an 18 per cent tax charge under the new rules unless your shareholding is at least 5 per cent, allowing you to qualify for entrepreneurs' relief.

Annual exemption users
If you regularly use your annual exemption, you will find that the loss of taper relief restricts the amount of tax-free gains that you can realise each year. For example, if an investment you have held for six years is sold in 2007/08, up to £11,500 of gains are tax-free because these fall within the annual exemption once 20 per cent taper is applied (£11,500 x 80 per cent = £9,200). In 2008/09 you can only realise £9,600 of gains tax-free, despite the increased annual exemption. The effect is even more marked where business assets taper relief applies. In 2007/08 £36,800 of gains subject to maximum business assets taper relief can be realised within the annual exemption (£36,800 x 25 per cent = £9,200).


One point that has been lost in all the controversy about the reform is that it will make the tax much simpler to calculate. Anyone who has wrestled with calculating gains on a series of investments (e.g. regular unit trust purchases or dividend reinvestments) will be glad to see the end of the complex amalgam of pooling and identification rules, taper relief and, for older holdings, indexation allowance.

Simon Michael MIFP AFPC ILLP is Managing Director of Mardon Financial Advisers Ltd, Kingsland House, Abbey Foregate, Shrewsbury. If you require further information or wish to suggest a topic for 2008 you can contact him, tel: 01743 285777, email: mail@mardons.co.uk. www.mardons.co.uk

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