The changes announced in the Capital Gains Tax (CGT) regime in the Chancellor of the Exchequer’s pre-budget report are more far-reaching than has generally been understood. In this article, we look at the impact of the changes and work out who are the winners and losers.
Business asset owners
Where a person disposes of a business asset held for more than two years, the effective rate of CGT for a higher-rate taxpayer will increase from 10 per cent to 18 per cent due to the abolition of CGT ‘taper relief’ from 6 April 2008.
According to the Tax Faculty of the Institute of Chartered Accountants in England and Wales, the abolition of indexation relief will significantly increase the CGT charge for those who hold assets acquired before 6 April 1998.
Particularly badly hit by the changes will be those who hold business assets for the longer term, for example farming businesses and furnished holiday lettings businesses.
Non-business asset owners
The current taper period for non-business assets is ten years, which complicates the situation somewhat. The application of non-business taper relief means that the minimum effective CGT rate on such assets is 24 per cent for a higher-rate taxpayer, so many higher-rate taxpayers with non-business assets are likely to be better off disposing of assets after 6 April 2008 and paying CGT at 18 per cent. However, the benefit or otherwise depends on the amount (if any) of the available ‘nil-band’ below which CGT is not payable (currently £9,200 per annum).
For basic-rate taxpayers, the effects are limited but mean that the effective tax charge on non-business assets held for five years or more rises.
What to do now
We strongly recommend that clients holding assets, especially business assets, consider their CGT position as soon as possible. Draft legislation is expected to be available at the beginning of 2008, so precise planning should be possible then. At the time of writing, a number of anomalies had been uncovered in the proposals, which are under discussion between the relevant professional bodies and HM Revenue and Customs.
We can advise you on tax-efficient strategies for holding and disposing of capital assets.
Source – ICAEW Tax Guide 4/07.