TT111: Capital Gains Tax Update

January 24, 2008

The Chancellor changes his mind!

After a barrage of criticism from the business community, the Chancellor has on 24 January 2008 announced a softening of the new Capital Gains Tax (CGT) rules due to take effect from 6 April 2008.

The death of Taper Relief

It had been proposed that the existing complicated, but often advantageous, regime of taxes that ranged from 40% down to 10% would be swept away to be replaced by a blanket 18% tax on all gains from 6 April 2008 onwards. This removed the beneficial rate of 10% tax that most of our clients anticipated paying on future disposals of their business assets.

The new rules also withdrew indexation allowance, which was another relief that could be claimed on gains made on assets that were held since before 6 April 1998.

The partial climb-down

The Chancellor has announced that the new rules will be altered to allow a 10% rate of tax on the first £1M of lifetime gains made by each individual. After that threshold has been exceeded the rate will be 18%.  Multiple gains would be accumulated over the life of the individual in calculating the lifetime amount that falls within the new threshold.

For most entrepreneurs this will be most welcome. It will allow quite sizeable gains to benefit from the 10% rate of tax.

The qualifications

The 10% rate will apply to gains made on the sale of trading businesses or shares in a trading company. The Treasury press release states that to qualify the shares would need to be held by employees, directors or other officers of the company and be in excess of 5% of the shares (holding at least 5% of the voting right). Subsequent legislation released requires the conditions to be met for a period of at least 12 months. (unlike the existing Taper Relief rules that require a two-year holding period to attain the 10% rate of tax).

Indexation

Note that indexation allowances will still be withdrawn for disposals made on or after 6 April 2008. At 10% or 18% tax these indexation allowances could have been a valuable relief. Clients should consider whether they could take action now to crystallise these reliefs.

Barnes Roffe Topical Tips:

    • Remember CGT is paid by individuals and trusts.
    • Companies will continue to pay Corporation Tax on their chargeable gains at the prevailing rate.
    • The holding of business assets in a company might be very tax-inefficient – you should review your business asset tax profile regularly.
    • You should ensure you know your position before the rules change to ensure there is nothing that you should be doing to minimise your tax

Consult your Barnes Roffe LLP contact Partner for guidance in this important area.

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