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Capital Gains Tax

Capital gains tax (CGT) annual exemption

Despite rumours that the annual exemption might change for 2010/11, it remains at the level set previously (£10,100).

CGT rates of tax

Legislation will be included in Finance Bill 2010 to introduce a new rate of CGT of 28%. For individuals, the rate of CGT remains at 18% where total taxable gains and income, after taking into account all allowable deductions including losses, personal allowances and the CGT annual exemption, are less than the upper limit of the income tax basic rate band (£37,400). The new 28% rate will apply to gains or any parts of gains above this limit.

Where Entrepreneurs’ Relief applies for individuals or trustees the rate remains at 10%.

The new rate of CGT will apply from 23 June 2010.

Gains arising in 2010/11, but before 23 June 2010, will continue to be liable to CGT at 18% and will not be taken into account in determining the rate(s) at which gains of individuals arising on or after 23 June 2010 should be charged.

Gains on disposals before 23 June 2010 which have been deferred until 23 June 2010 or later under certain CGT reliefs (eg gains deferred under the Enterprise Investment Scheme) will be liable to CGT at the time the deferral period ends. The gain becomes liable to tax in the same way as gains arising on disposals on or after this date at either 18% or 28%.

In working out the CGT due, taxpayers will be able to deduct losses and the annual exemption in the way which minimises the tax due.

Example

In 2010/11 David’s taxable income, after all allowable deductions and the personal allowance, is £27,400. The upper limit of the income tax basic rate band is £37,400. David has the following capital transactions:

May 2010 he sells an asset and realises a chargeable gain of £17,000.
November 2010 he sells another asset, realising a chargeable gain of £25,100.
David has no allowable losses to set against these gains, and the annual exemption for 2010/11 is £10,100. Neither of the gains qualify for Entrepreneurs’ Relief.

David’s taxable income is £10,000 less than the upper limit of the basic rate band (£37,400 - £27,400).

David sets the annual exemption against the later gain (because part of that gain is liable to tax at the higher CGT rate), which leaves £15,000 taxable (£25,100 – £10,100). The first £10,000 of the £15,000 is taxed at 18% and the remaining £5,000 is taxed at 28%.

The £17,000 chargeable gain David realised in May 2010 before the change of rates on 23 June 2010 is taxable at 18%.

Trusts

For trustees and personal representatives of deceased persons, the CGT rate will be 28% for gains arising on or after 23 June 2010, except where Entrepreneurs’ Relief applies.

Entrepreneurs’ Relief

Subject to a number of conditions, gains on disposals of entrepreneurial businesses by individuals and certain trustees qualify for Entrepreneurs’ Relief. The relief is given by reducing the qualifying gains by 4/9 and the balance is then charged at an 18% rate of tax. This results in the qualifying gains being taxed at an effective rate of 10%.

The changes to the CGT rates from 23 June 2010 would mean that the 4/9 reduction no longer achieved an effective rate of 10%. Finance Bill 2010 will include provisions to charge gains on qualifying disposals on or after 23 June 2010 at a 10% rate of tax. The previous 4/9 reduction will cease to apply from this date.

Finance Bill 2010 will include provision to increase the amount of gains that can qualify for Entrepreneurs’ Relief to £5 million (previously £2 million) from 23 June 2010.

Where individuals or trustees make qualifying gains above the previous £2 million limit before 23 June 2010 (£1 million before 6 April 2010) no additional relief will be allowed for the excess above the old limit. If they make further qualifying gains on or after 23 June 2010, they will be able to claim relief on up to a further £3 million of those additional gains (or up to £4 million where the earlier £1 million limit applied), giving relief on accumulated qualifying gains up to the new limit of £5 million.

In determining at what rate(s) an individual should be charged to CGT on any other gains, those gains qualifying for Entrepreneurs’ Relief are set against any unused basic rate band before non qualifying gains.