In his Pre-Budget Report on 9 October 2007 the Chancellor proposed radical changes to the taxation of capital gains to simplify the system. The proposals will come into effect on 6 April 2008, but the legislation is unlikely to become law until some months later. Due to pressure from lobby groups the original proposals have already been modified and there is concern that there may be further changes before the provisions become law. This makes planning very difficult.

The proposals mean that from 6 April 2008:

  • indexation allowance is abolished;
  • taper relief is abolished;
  • in most cases the rate of tax will be 18%.

As a result capital gains tax should be a simple calculation: net sale proceeds less acquisition value, allowable expenditure and the annual allowance gives the gain which is taxed at 18%. The only exception will be:-

Entrepreneur Relief

The relief is similar to the old Retirement Relief which was phased out a few years ago. There are a number of differences, not least that the taxpayer does not have to retire and there is no age condition.

The relief applies to disposals made by individuals involved in a business and means the first £1 million of qualifying gains in a lifetime will be taxed at 10%. It only applies to disposals by individuals of the whole or part of a business, not just of business assets unless the business ceases.

There are conditions:

  • It must be a trading business (ie not an investment business)
  • Business assets must be sold within three years of cessation
  • The relief can extend to certain shares in a trading company
  • The relief can be available to trustees in limited circumstances

The capital gains tax changes were announced as a “simplification” process, but it is estimated that the Treasury’s receipts from capital gains tax will increase as a result of the proposals

There will be winners and losers under the proposals.

You are likely to be worse off if:

  • indexation allowance would have substantially reduced the chargeable gain (note that this is true of most farmers who have owned their land for many years)
  • you own AIM shares or shares in certain other enterprise investment schemes
  • gains which would have qualified for 10% CGT have been deferred by rollover or holdover relief in the past
  • gains have been deferred into qualifying corporate bonds
  • gains are made by lower rate taxpayers (or non taxpayers)

You are likely to be better off if:

  • you have non-business assets (unless indexation allowance is a significant factor)
  • you are a beneficiary of an offshore trust.

We recommend that you take advice if any of the following apply:

  • you intend to dispose of assets in the next year or so – is it better to do so before or after 6 April 2008?
  • if you have shares in a family company – planning may be required to ensure the shares qualify for Entrepreneur Relief;
  • if you are selling your company, should the sale structure be reconsidered?
  • If you hold qualifying corporate bonds – consider early redemption.

You might consider triggering a disposal if indexation and business asset taper relief are significant, perhaps by a gift into a settlor-interested trust, or to a spouse.

The effects of this proposed simplification are complex and we recommend that you are fully advised on the consequences before taking any action.