Warr & Co Chartered Accountants - Article - Changes To Capital Gains Tax

A History of Capital Gains Tax (CGT)

Capital Gain Tax (CGT) was first introduced in the UK on 6th April 1965. Until 1978 it was a fairly straightforward tax. No tax arose unless total disposal proceeds in a tax year exceeded £1,000. If they did, a single rate of 30% applied. The only minor complication was that gains arising before 6th April 1965 were exempt so in many instances a person making a disposal in the early years of this tax had to obtain a 6th April 1965 valuation.

In 1978 the £1,000 disposal threshold was replaced with an annual exemption linked to gains. Initially a lower rate of tax applied to gains marginally over the annual exemption and this was increased gradually so that the full rate applied to the whole of any large gain.

Over the years there were a number of further significant changes which are set out below.

1. In 1982 indexation was introduced to eliminate from the charge to tax any gain resulting from inflation.

2. In 1988 there was a re-basing to exempt from tax all gains arising before 31st March 1982.

3. In 1998 indexation was abolished and replaced with taper relief. Initially taper relief worked by reducing over a maximum of 10 years the gain chargeable when an asset was disposed of by reference to the length of time that asset had been held. The rate of taper relief was determined by whether the asset being disposed of was a business asset or non business asset.

4. Further changes to taper relief were made in successive years, reducing the period over which taper relief applies to business assets first to 4 years and then to 2 years. There were also a number of changes to the definition of “business asset” for taper relief purposes.

The result is that what started as a straightforward simple tax in 1965 had become by 2007 horrendously complex. A person disposing of an asset now has to take account of and consider in addition to the cost and disposal proceeds:

(a) the date it was purchased;

(b) if appropriate, the value of the asset on 31st March 1982 and 6th April 1965;

(d) if so, whether that has been the case for the whole period that the asset has been owned.

The Chancellor saw a need for simplification and so in the 2007 Autumn Statement he announced that he would greatly simplify Capital Gains Tax. Under the new rules, which commence on 6th April 2008 indexation and taper relief will be withdrawn and a single rate of 18% will be applied to all gains in excess of the annual exemption.

Of course, this simplification created winners and losers. Perhaps the most vociferous opposition came from the small business sector who saw this simplification as a doubling of the tax they would pay on selling their businesses. Faced with this pressure, in January 2008 the Chancellor made a concession by announcing that an “Entrepreneurs Relief” would be introduced which would apply to reduce gains on the disposal of business assets by four ninths to result in an effective tax charge of 10%. This relief is to come with a lifetime limit of £1 million per person.

Taxpayers who are considering disposing of assets need to decide whether to do so in 2007/08 or 2008/09. Each case needs to be considered on its merits and professional advice is essential. However, 3 fictional cases are considered below. In each case it is assumed that the annual exemption will increase to £9,500 for 2008/09.

1. Anne

Anne is 69, single, and her only source of income is a state pension. She lives in a flat, which she owns, but she also has an investment property that she purchased in January 1998. For most of her period of ownership it has been tenanted, but it has been empty since March 2007. If she sells it she expects to make a gain of £60,000. Her tax liabilities are set out below: -

	2007/2008	2008/2009
Gain	£60,000	£60,000
less Taper Relief @ 40% / 0%	£24,000	-
	£36,000	£60,000
less Annual Exemption	£9,200	£9,500
Chargeable Gain	£26,800	£50,500
Tax @ 20% / 18%	£5,360	£9,090

Clearly Anne should sell before 5th April 2008 if at all possible.

2. Bob

Bob is in his mid forties and is an IT project manager working for a London based bank, he earns a salary of £100,000 per annum. Just under 3 years ago Bob made a speculative purchase of shares in a newly floated technology company. The shares have performed well and Bob is sitting on a gain of £100,000. He now thinks the time is about right to sell. His tax liabilities are set out below: -

	2007/2008	2008/2009
Gain	£100,000	£100,000
less Annual Exemption	£9,200	£9,500
Chargeable Gain	£90,800	£90,500
Tax @ 40% / 18%	£36,320	£16,290

Clearly Bob should sell his shares after 5th April 2008.

3. Chris

Twenty five years ago Chris bought a newsagents shop, paying £50,000 for the property and £50,000 for the goodwill. In recent years trading has been bad and for the last 12 months the business has failed to break even, draining Chris’s savings. A developer has offered to buy the property for £300,000. Indexation has increased the base cost of the property and goodwill by £100,000. His tax liabilities are set out below: -

	2007/2008	2008/2009
Gain	£300,000	£300,000
less Cost	£100,000	£100,000
less Indexation	£100,000	-
	£100,000	£200,000
less Taper Relief / Entrepreneur Relief	£75,000	£88,889
	£25,000	£111,111
less Annual Exemption	£9,200	£9,500
Chargeable Gain	£15,800	£101,611
Tax @ 20% / 18%	£3,160	£18,290

Clearly Chris should sell his property before 6th April 2008.

It is evident that there is no broad brush approach with regards to planning disposals and crystallising capital gains. Therefore, we highly recommend that individuals seek professional advice before progressing such planning.

Further consideration may be given to Enterprise Investment Schemes (EISs) as a medium through which any realised gains may be deferred. Equally, advice should be sought regarding these as, despite the many tax advantages, they can be high risk investments.

Date of Article: 28th January 2008

Tim Warr - Warr on...