TT104: Capital Gains Tax Update

October 22, 2007

A major shake-up

As has been widely publicised after the Pre Budget Statement, there will be a significant change to the capital gains tax (CGT) regime from April 2008 for individuals and trustees making disposals. Taper Relief will be abolished and there will be a flat rate of 18% on all taxable gains made on disposals from that date. (This is the first major shake up since Gordon Brown, then Chancellor, made dramatic alterations in 1998.)

The current regime

This is fairly complex. The rate of tax paid by individuals depends on whether they are a basic or higher rate taxpayer (the threshold being £39,825 for the tax year to 5 April 2008).

It also depends on the length of time the asset has been held. A capital gain is reduced by Taper Relief. There are two types of Taper Relief, one for business assets and one for all other assets. For business assets the gain is reduced by 50% for assets owned for over 12 months and by 75% for assets held for over 24 months. For all other assets the gain tapers by 5% for each full year of ownership from the third year to the tenth year, eventually exempting 40% of the gain after the full decade of ownership (i.e. for a higher rate taxpayer, each 5% taper of the gain reduces the rate of tax by 2%).

Business assets most commonly held by Barnes Roffe clients tend to be: shares in trading companies; interests in partnerships; properties rented to trading businesses for use in their trade; and some AIM shares. Note that the rules defining business assets for shares and property changed in 2000 and 2004, so some assets have a mixed period of ownership where they qualified as business and non-business assets. This makes the calculation complicated.

Finally, for some assets held before March 1982, you can calculate the gain by reference to the March 1982 value plus indexation uplift (i.e. not the original cost). This will usually reduce the gain.

So is it good news, or bad news?

The table below shows the effective range of rates of tax payable after considering Taper Relief. (Note all taxpayers get a CGT-free annual exemption. This is £9,200 for 2007/08.)

Basic rate Taxpayer Higher rate Taxpayer
Business assets held for:
< 1 year 20% 40%
> 1 year and < 2 years 10% 20%
> 2 years 5% 10%
All other assets held for:
< 1 year 20% 40%
2 whole years 20% 40%
3 whole years 19% 38%
4 whole years 18% 36%
5 whole years 17% 34%
6 whole years 16% 32%
7 whole years 15% 30%
8 whole years 14% 28%
9 whole years 13% 26%
10 whole years 12% 24%

Superficially, most higher rate taxpayers appear to be better off with the new rate of 18%. The exceptions, unfortunately, are owners of business assets – usually people who have built up businesses and want to benefit from their endeavours and the risks they have taken.

The situation is further complicated by the forthcoming removal of the indexation allowance for assets held since before 5 April 1998. This allows the cost of the asset (or March 1982 market value if the asset was held at that date) to be uplifted for inflation before deduction from the sales proceeds to calculate the gain. The indexation can only be calculated to March 1998 when the Taper Relief rules were introduced, but it can be quite valuable. This allowance will be withdrawn from 5 April 2008.

Barnes Roffe Topical Tips:

  • Carefully consider the timing of disposals between now and April. A few weeks sooner or later could have dramatic CGT consequences.
  • Do not rush to sell assets until you have considered if another anniversary of ownership (for sales before 5 April 2008) could reduce your tax bill further.
  • Beware exchanging contracts with delayed completion – for CGT the effective date for the tax to be calculated is the date an unconditional contract is entered into, not the date the contract completes.  For most property assets this means that the CGT point is earlier than the actual transfer of the property.
  • Take action to fully understand your exposure to this tax.

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

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