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Capital Gains Tax

A capital gain arises when certain capital (or 'chargeable') assets are sold at a profit. The gain is the sale proceeds (net of selling costs) less the purchase price (including acquisition costs).The taxation of capital gains has been significantly revised from 6 April 2008. This fact sheet deals with the current position.

What are the Main Features of the Current System?

• a flat rate of capital gains tax (CGT) of 18% is to apply to all chargeable gains and
• a new Entrepreneurs’ relief may be available on certain business disposals.

For any gains arising on or after 6 April 2008 and any held over gains coming into charge on or after that date, the chargeable gain will be liable to tax at 18%, after deducting allowable losses, any other reliefs and the annual exemption.
 

Entrepreneurs' Relief

 

Entrepreneurs' relief (ER) may be available for certain business disposals taking place on or after 6 April 2008. For a higher rate tax payer it has the effect of charging the first £1m of gains qualifying for the relief at an effective rate of 10%.

The relief will apply to gains arising on a disposal of:

• the whole, or part, of a trading business that is carried on by the individual, either alone or in partnership;
• shares in a trading company, or holding company of a trading group, provided that the individual owns broadly a 5% shareholding and has been an officer or employee of the company;
• assets used by a business or a company which has ceased;
• assets used in a partnership or by a company but owned by an individual, if the assets disposed of are ‘associated’ with the withdrawal of the individual from participation in the partnership or the company.

A trading business also includes professions but only includes a property business if it is a ‘furnished holiday lettings’ business.

Restrictions on obtaining the relief on an “associated disposal” are likely to apply in certain specific situations. This includes the common situation where a property is currently in personal ownership, but is used in an unquoted company or partnership trade in return for a rent. Under ER the availability of relief is restricted where rent in paid from 6 April 2008 onwards.
 

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, regardless of when they were originally acquired. However, ‘same day’ transactions will continue to be matched and the ‘30 day’ anti-avoidance rules will remain.

Example

On 15 April 2009 Jeff sold 2000 shares in A plc from his holding of 4000 shares which he had acquired as follows:
 

 

1000 in January 1990
1500 in March 2001
1500 in July 2005

Due to significant stock market changes he decided to purchase 500 shares on 30 April 2009 in the same company.

The disposal of 2000 shares will be matched firstly with later transaction of 500 shares as it is within the following 30 days and then with 1,500/ 4000 (1000+1500+1500) of the single asset pool on an average cost basis.

Capital Gains Tax Annual Exemption

 

Every tax year each individual is allowed to make gains up to the annual exemption without paying any CGT. The annual exemption for 2009/10 is £10,100. Consideration should be given to ensuring both spouses/civil partners utilise this facility.

Other Reliefs which You may be Entitled to

 

And finally, many existing reliefs continue to be available, such as:

• private residence relief;
• business asset roll-over relief, which enables the gain on a business asset to be deferred until a point in the future;
• business asset gift relief, which allows the gain on business assets that are given away to be held over until the assets are disposed of by the donee; and
• any unused allowable losses from previous years, which can be brought forward in order to reduce any gains.

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For information of users: This material is published for the information of clients. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by the authors or the firm.

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