Capital gains tax reform
10th October 2007
PN01
In the documents accompanying the 2007 Pre-Budget Report and Comprehensive Spending Review, Press Notice PN01 (which is available here) states:
“The 2007 Pre-Budget Report announces a major reform of capital gains tax, which will put it on a more sustainable footing that is straightforward for taxpayers and internationally competitive. For disposals on or after 6 April 2008 there will be a single rate of capital gains tax of 18 per cent. As part of this new system the annual exempt amount (currently £9,200) will remain in place, but taper relief and indexation allowance will be withdrawn. For disposals before this date the current rules will continue to apply. HMRC have today published further details of the proposed changes and will immediately begin discussion with interested parties on the technical detail and implementation.”
PBRN17
Pre-Budget Report Note PBRN17 (which is available here) provides some of the detail.
Capital gains tax will be simplified. The legislation will be contained in the Finance Bill 2008, applying to disposals made on or after 6 April 2008. It will introduce a new single rate of charge to CGT at 18 per cent. The trade off (the kicker for some, and the sweetener for others) is in the following:
- Taper relief will be withdrawn
- The indexation allowance will be withdrawn
- The ‘kink test’ for assets held at 31 March 1982 will be abolished
- Halving relief will be abolished
- The share identification rules will be simplified
The Annual Exempt Amount (AEA), which is currently £9,200 for individuals and £4,600 for some trustees, will remain.
CGT reliefs, such as Private Residence Relief, business asset roll-over relief, the Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCT) (without taper relief), and business asset gift hold-over relief will continue to apply. Any unused allowable losses from past years can continue to be brought forward in order to reduce any gains.
Examples are given (using the current AEA for illustrative purposes). I quote them in full:
- In 1995 Mr E purchased a holiday home in Devon for £100,000. He sells it in July 2008 for £250,000. The CGT due is calculated by deducting the purchase cost of £100,000 from the sale proceeds of £250,000 to give a gain of £150,000. Assuming he has no other capital gains in the tax year 2008-09 he can deduct from this the full AEA of £9,200 giving a chargeable gain of £140,800. That gain is taxed at 18 per cent giving tax payable of £25,344.
- In 1960 Miss S purchased some shares costing £500. In March 1982 they were worth £450. In August 2008 she sells the shares for £25,000. To calculate her CGT liability Miss S will need to deduct from the disposal proceeds of £25,000 the March 1982 valuation of £450 giving £24,550. (She cannot deduct the cost of the shares of £500 as abolition of the kink test means she has to use the March 1982 valuation.) Assuming she has the full AEA for 2008-09 available she then deducts the £9,200 giving a chargeable gain of £15,350. That gain is taxed at 18 per cent giving tax payable of £2,763.
- In 2006 Mr D had a loss of £30,000 on disposal of an asset. He had no other gains against which he could set off the loss. In June 2008 he sold his holiday home at a gain of £80,000. To calculate his liability to CGT Mr D can still bring forward his loss of £30,000 and set it off to reduce the gain to £50,000. Assuming the full AEA for 2008-09 is available he then deducts £9,200 giving a chargeable gain of £40,800. That gain is taxed at 18 per cent giving tax payable of £7,344.
- In November 2007 Miss E enters into an unconditional contract to sell assets to Mr Y in May 2008. Because the contract is unconditional the disposal takes place for CGT purposes in November 2007 and the existing rules for indexation (if appropriate), taper and rates of tax will apply. The gain is chargeable for 2007-08, and the tax is payable in January 2009 under the normal Self-Assessment rules.
- Also in November 2007 Ms F enters into a conditional contract to sell assets to Mr Q in May 2008. Because the contract is conditional the disposal date is when the conditions are satisfied. If the conditions are satisfied in May 2008 then the new rules will apply, the gain will be chargeable in the year 2008-09 at the new rate of 18 per cent, and the tax will be payable in January 2010.
- Mr G owns a fish and chip shop in Brighton. On 1 June 2008 he sells the shop and reinvests the gain into buying a larger shop on the seafront. Mr G claims business asset roll-over relief so there is no tax payable when he disposes of the shop. CGT liability will be deferred until a point in the future (this may be on the disposal of the replacement shop if it is not replaced with another qualifying business asset).
Draft legislation will be published later this year; meanwhile HMRC will be consulting on the details.
2 Responses to “Capital gains tax reform”
Got something to say?
You must be logged in to post a comment.
[...] the inheritance tax changes made by the Pre-Budget Report drew immediate comment and interest (see this post), reaction to the proposed capital gains tax changes is showing a slow but sure buildup. Is it [...]
[...] Capital gains tax reformPN01 In the documents accompanying the 2007 Pre-Budget Report and Comprehensive Spending Review, Press Notice PN01 (which is available here) states: “The 2007 Pre-Budget Report announces a major reform of capital gains tax, … [...]