Capital Gains Tax – where are we now?
- Pre-Budget Report, 9th October 2007 – CGT flat rate of 18% for gains on non-business assets made on or after 6th April 2008.
- 6th April 2010 – income tax rate of 50% for those with incomes in excess of £150,000.
This all adds up to a differential of 32% for those individuals. Was this sustainable?
The new Coalition Government seemed to put the writing on the wall for this state of affairs with their document entitled “Our programme for Government”, published on 20th May 2010. It included the sentence:
“We will seek ways of taxing non-business capital gains at rates similar or close to those applied to income, with generous exemptions for entrepreneurial business activities.”
Just what did that mean? Speculation began. Well, we’ve now had the Emergency Budget and what we’ve ended up with wasn’t as bad as some commentators thought. The position is now as follows:
- The effective rate of CGT for gains qualifying for entrepreneurs’ relief will remain at 10%. However, the lifetime limit on gains which qualify for entrepreneurs’ relief will increase from £2 million to £5 million for disposals on or after 23rd June 2010.
- The rate of CGT on gains made by individuals, personal representatives and trustees before 23rd June 2010 remains at 18%. These gains will not be taken into account in determining the rate(s) at which gains arising to individuals on or after this date should be charged.
- For disposals made on or after 23rd June 2010, the rate of CGT will remain at 18% for individuals whose total income and net gains when added together fall within the basic rate income tax limit.
- A rate of 28% will apply to gains made by those who are above the basic rate limit.
- Therefore, some people will pay tax at 18% on part of their gains and 28% on the balance.
- The annual exemption for 2010/2011 will remain at £10,100 for individuals and £5,050 for most trusts.
- For trustees and personal representatives, the rate is increased to 28% for gains on disposals made on or after 23rd June 2010.
All of this means we have gone back to a system that is similar to the one that we had before 6th April 2008, in that gains are added to an individual’s income as the top slice, and the rate of CGT will depend on whether the total of the income and gains is within or in excess of, the basic rate income tax limit. This time however, there is no taper relief and the indexation allowance is no longer available. Meaning that the gain after applying the annual exemption is taxed at the flat rate of either 18%, 28% or a combination of the two where:
- part of the gain falls within the basic rate income tax limit, and
- part is in excess of that limit.
The increase in the lifetime limit for entrepreneurs’ relief was very welcome for that type of person. Entrepreneurs have had a good few months. Following the increase in the limit from £1 million to £2 million, announced in the March Budget, the limit has now risen to 5 times the level that it was on 5th April 2010. This could be beneficial, as the less tax there is to pay on the sale of a business means there is more capital to invest in appropriate tax wrappers.
What other opportunities are there now? Well, inter-spouse/civil partner transfers are back as far as tax planning is concerned. Prior to these changes, the only point in transferring assets to a spouse/civil partner from a CGT perspective was to ensure that both annual exemptions could be utilised. This is still important, but now an unconditional transfer of assets from a higher rate or additional rate taxpayer to a basic or non-tax paying spouse/civil partner will result in a tax saving on a subsequent disposal by the recipient.
Another area that should be looked at is the single premium bond versus collective investments. An increase in the rate of CGT will make bond investment look more attractive, in spite of the CGT planning opportunities mentioned above. The reduction in the basic rate income tax limit which will be introduced from 2011/2012, as a result of the increase in the personal allowance to £7,475, will also make the need for independent financial advice greater than ever. It is anticipated that this increase will cause an extra 700,000 individuals to become higher rate tax payers. Use of pension contributions could have a double benefit here as this will effectively provide a person with more basic rate band and possibly also result in a lower rate of CGT being payable.
Finally, the introduction of the 28% rate for trustees and personal representatives will make it even less attractive for trustees to hold equities direct. This is because every disposal which generates a gain in excess of the annual exemption (£5,050 for most trusts) will produce a 28% tax liability. The popularity of multi-manager funds may increase but this higher CGT rate will make single premium bonds look even more attractive for trustees of discretionary trusts and accumulation and maintenance trusts than they already did before.
So, even more reason to seek an independent financial adviser for tax planning, estate planning and investment advice.