'CAPITAL
GAINS TAX'
My
article in the Winter 2007 edition of
Genie provided a brief summary of the
proposed changes to capital gains tax
announced in the Pre-Budget Report.
Since then, draft legislation was published
on 24th January, 2008, providing further
information on the replacement of taper
relief and indexation allowances by a
flat rate of 18% capital gains tax for
gains arising after 5th April, 2008.
|
|
The Chancellor also announced the introduction
of an ‘Entrepreneurs’ Relief’
in response to the weight of representations
on the unfair impact of the proposed new regime
on many business asset owners.
Draft legislation on this new relief was published
on 28th February, 2008, confirming that the
new relief will reduce gains liable to capital
gains tax at the single 18% rate by 4/9ths resulting
in an effective 10% rate. The relief will be
available for gains of up to £1 million.
The £1 million is a lifetime allowance
so an individual can make more than one claim.
The conditions for the new relief will be based
broadly on the ‘retirement relief’
provisions that were phased out between 1998
and 2003. There will be no minimum age limit
and the relief will be available where the relevant
conditions are met for a period of one year.
The relief will apply to gains arising on disposals
of the whole or part of a trading business that
is carried on by the individual, either alone
or in partnership. Where a business ceases,
relief will be available on gains on assets
formerly used in the business and disposed of
within 3 years of the cessation of the business.
The relief will also apply to gains on disposal
of the shares and securities in a trading company
(or the holding company of a trading group)
provided that the individual making the disposal;
- has been an officer or employee of the company,
or of a company in the same group of companies
and
- owns at least 5% of the ordinary share capital
of the company which enables the individual
to exercise at least 5% of the voting rights
in that company
Where an individual qualifies for ‘Entrepreneurs’
Relief’ on a disposal of shares, relief
will also be available in respect of any associated
disposal of an asset used in the company’s
business.
The relief will not apply to a property letting
business other than furnished holiday lettings
and thus a gain arising on the disposal of an
investment property let to an unquoted company
which would have attracted an effective rate
of capital gains tax of 10% if, it had qualified
for maximum business asset taper relief, will
now suffer a rate of 18%.
Although the new relief will provide some help
to owners of businesses and trading companies,
the relief will not benefit the majority of
employees who hold approved share options over
less than 5% of the shares in their employer
company and many private equity holdings.
There will be both winners and losers from the
changes to capital gains tax, some of which
are as follows;
Winners
- those with buy to let properties and other
non-business assets whose minimum effective
rate of capital gains tax after 10 years of
ownership was 24%, but is now 18%
- short term holders of nonbusiness assets who
see a reduction in their tax rate from 40% to
18%
Losers
- those for whom indexation allowance is significant,
for example individuals who have owned assets
since March 1982 where indexation effectively
doubles the base cost. Such individuals should
consider gifting such assets to their spouse
prior to 5th April 2008 in order to ‘bank’
the indexation allowance.
- those individuals who have rolled over or
held over a gain that would have been chargeable
at 10%, but will now become chargeable at 18%
- those who let property and other assets to
traders
- those
for whom maximum business asset taper relief
was available which will mean their effective
rate of capital gains tax increasing from 10%
to 18% unless they qualify for ‘Entrepreneurs’
Relief’. Such individuals could consider
a gift or sale of the asset to a trust prior
to 5th April, 2008, depending on the size of
the inherent gain and their future intentions
concerning the asset.
DAVID CONVISSER
|
