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Capital gains tax
reform |
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For the tax year 2008/09 there will be a single rate of capital
gains tax (CGT) set at 18%. The rate will apply to individuals,
trustees and personal representatives. The 18% rate of CGT does
not affect the income tax rates. |
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A number of changes to simplify the capital gains tax regime
will be made, effective for disposals on or after 6 April 2008,
including: |
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The withdrawal of taper relief (even if assets
were held before 6 April 2008) |
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The withdrawal of indexation allowance (this change will
only affect assets that were acquired before 6 April 1998) |
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The abolition of the ‘kink test’ (this means
that all assets held on 31 March 1982 will be deemed to
have had a cost equivalent to their market value on that
date) |
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Simplification of the share identification rules. From
6 April 2008 all shares of the same class in the same company
will be treated as forming a single asset (a ‘share
pool’), regardless of when they were originally acquired.
However, the same day rules and bed and breakfasting rules
remain unchanged, and shares will be identified under those
rules before they are identified with shares in the share
pool. |
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The Annual Exempt Amount (AEA) will remain. The current level
for 2007/08 is £9,200 for individuals and £4,600
for some trustees. The AEA for 2008/09 will be announced at Budget
2008. Other CGT reliefs, as explained below, continue to have
effect.
These measures will have effect for disposals
made on or after 6 April 2008 and for held over
gains coming into charge on or after 6 April 2008.
The current CGT rules continue to apply for disposals
made up to 5 April 2008.
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Examples |
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As a result of these changes, individuals disposing of assets
on or after 6 April 2008 will work out the tax due as follows
(please note that these examples use the 2007/08 AEA for illustrative
purposes; the AEA for 2008/09 will be announced at Budget 2008): |
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In 1995 Andrew purchased a holiday home in
Devon for £100,000. He sells it in July 2008 for £250,000.
The CGT due is calculated by deducting the purchase cost
of £100,000 from the sale proceeds of £250,000
to give a gain of £150,000. Assuming he has no other
capital gains in the tax year 2008/09 he can deduct from
this the full AEA of £9,200 giving a chargeable gain
of £140,800. That gain is taxed at 18% giving tax
payable on 31 January 2010 of £25,344. |
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In 1960 Sam purchased some shares costing £500.
In March 1982 they were worth £450. In August 2008
she sells the shares for £25,000. To calculate her
CGT liability Sam will need to deduct from the disposal
proceeds of £25,000 the March 1982 valuation of £450,
giving £24,550. (She cannot deduct the cost of the
shares of £500 as abolition of the kink test means
she has to use the March 1982 valuation.) Assuming she
has the full AEA for 2008/09 available she then deducts
the £9,200 giving a chargeable gain of £15,350.
That gain is taxed at 18% giving tax payable of £2,763. |
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Other CGT reliefs will continue to be available. For example:
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Private Residence Relief will continue to
be available for principal private residences |
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Business asset roll-over relief continues to be available.
Roll-over relief enables the CGT payable on the gain on
a chargeable asset to be deferred until a point in the
future. Taper relief is not given on the rolled-over gain
under the current rules |
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The Enterprise Investment Scheme (EIS) and Venture Capital
Trusts (VCT) attract a number of CGT reliefs. These include:
CGT exemption where income tax relief has been claimed;
loss relief on unquoted shares; deferral relief; and extended
taper relief (all subject to certain conditions). For disposals
on or after 6 April 2008 there will be no taper relief
available. All other CGT EIS and VCT reliefs continue to
apply |
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Business asset gift hold-over relief also continues to
apply. This relief allows CGT on business assets that are
given away to be held over until the assets are disposed
of by the donee |
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Unused allowable losses from past years will continue
to be allowed to be brought forward in order to reduce
any gains. |
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·Note: companies that are liable to corporation
tax in respect of their chargeable gains are not affected by
any of these changes. |
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Inheritance tax (IHT) |
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The IHT nil-rate band – effectively the ‘exemption’ – on
the death of one spouse or civil partner was specific to that
individual death estate and could not be carried forward. In
many cases, this resulted in a large IHT liability on the death
of the surviving spouse or civil partner.
With effect from second deaths on or after 9 October 2007
the unused percentage of the nil-rate band from the first
death estate can be carried forward and added to the nil-rate
band available to the second.
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For example: |
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On the first death none of the original nil-rate
band was used because the entire estate was left to a surviving
spouse. Then if the nil-rate band when the surviving spouse
dies is £350,000 that would be increased by 100%
to £700,000 |
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If on the first death the chargeable estate is £150,000
and the nil-rate band is £300,000, then 50% of the
original nil-rate band would be unused. If the nil-rate
band when the surviving spouse dies is £350,000,
then that would be increased by 50% to £525,000. |
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A similar provision will apply to alternatively secured pensions
(ASPs). This will make the same proportion of the original owner’s
nil-rate band that was not used by their death estate available
against the ASP charge on the cessation of the relevant dependant’s
pension benefits. |
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Inheriting pensions |
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Rules which will take effect from surrenders made after
9 October 2007 and deaths after 5 April 2008 will introduce
taxing provisions affecting:
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Surrender of rights to payments under a
lifetime or dependant’s annuity |
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A connected person becoming entitled to an increase
in their scheme pension rights following, and in consequence
of, the death of a member |
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A scheme member whose scheme rights are increased by
virtue of the death of another scheme member at age 75
or more, or who becomes entitled to an unauthorised lump
sum in consequence of that death. |
Full details will be included in Finance Bill 2008.
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