Capital gains tax

Simplification leads to a major reform

Since the end of last year there has been much media talk and press coverage about the changes announced by the Chancellor in his first Pre−Budget Report. But for many of us what really are capital gains tax (CGT) and how could these changes announced potentially affect us?

We each all receive an annual CGT allowance and any profits within it are tax−free. In this current 2007/08 tax year the allowance stands at £9,200. CGT is a tax paid on any profits you make from selling an asset such as stocks and shares, a property (although your main home is exempt), antiques, or even a business.

Any profits over that amount are added to your income and taxed at the relevant rate. In the current tax year, depending on how much you earn your profits will either be taxed at 10 per cent, 20 per cent, or 40 per cent. There are ways to reduce your tax bill by offsetting any losses you make from selling assets against any gains and, currently in this tax year, you can benefit from taper relief.

At last years Pre−Budget Report the Chancellor announced a major reform of the CGT regime. As part of this change the tax−free annual exempt amount will remain, but taper relief and the indexation allowance will be withdrawn from 6 April this year.

All assets will from April be subject to a charge of 18 per cent regardless of the length of time you had owned them. The change was designed to increase taxes paid by private equity firms and, according to the Government, deliver a more sustainable, simplified and internationally competitive system.

The changes are good news for private landlords, the real winners, as they will be better off under the new flat−rate scheme. However, for many small business owners, an 18 per cent flat rate could mean paying almost twice as much tax when they sell up. In addition employees who are members of their company’s save as you earn scheme also face a tax increase if their profits are bigger than their annual CGT allowance.

The government is sticking with its plans to scrap taper relief and introduce the flat rate, so buy−to−let investors will still benefit from lower taxes, while investors who are members of save as you earn schemes could still end up paying more. However, for small business owners there is a new entrepreneurs’ relief.

This will allow them, and any employees or company directors who hold at least 5 per cent of a company’s shares, to pay just 10 per cent on their first £1million of capital gains. Individuals will be able to claim relief on gains from a number of investments, but only up to £1million of profits over their lifetime, not for each sale. On gains above £1million profits will be taxed at 18 per cent.

Levels and bases of, and reliefs from, taxation are subject to change.