Capital Gains Tax Taper Relief to be abolished

The Pre-Budget speech also included the shock announcement that taper relief for capital gains tax (CGT) will be abolished from 6 April 2008. This announcement took everyone by surprise and it is still unclear in some circumstances how these rules will be applied. There is also much speculation that the proposed changes may not be implemented or may be deferred.

HMRC have however issued several examples of how they envisage the rules working. At the same time as abolishing taper relief the government proposed to change the rate of CGT to a flat rate of 18%. Higher rate taxpayers currently pay CGT at 40%.
Taper relief
Taper relief was introduced in 1998 and can significantly reduce the amount of any gain chargeable to CGT by as much as 75%. The percentage of the relief available depends on whether the asset is classed as a ‘business’ or ‘non-business’ asset and, also, the period of ownership of the asset since 1998 (when the rules were introduced).
To give a straightforward example if you sold some shares that you have owned for two years that have always been a business asset then you would pay tax on the chargeable gain (proceeds less cost less 75% taper relief). The remaining gain would be taxed at your top rate of tax of say 40%.
If you sell the same shares on or after 6 April 2008 taper relief will no longer be available to reduce the amount of the taxable gain. The rate of tax applicable to taxable gains will be changed from 6 April 2008 to 18%.

The Chancellor confirmed that the annual exemption, which for the current tax year is £9,200, will continue to be available in the next tax year. The amount of the exemption has not yet been announced.

Inflation allowance
Another complication in current capital gains computations is that if you have assets which you acquired before April 1998 you are currently allowed to include an element of inflation in your capital gains tax computation. This inflation allowance, known as indexation, increases the cost of your asset and therefore reduces the amount of the taxable gain. This relief will also no longer be available in computations from 6 April 2008.
Will I have more tax to pay?
These rules will generally increase the amount of tax payable by individuals who own assets that currently qualify for full business asset taper relief. There are many conditions that have to apply for assets to qualify, and the definition of a business asset has changed since the introduction of the rules in 1998.
If you are planning to sell assets in the near future please do get in touch so we can advise you.

John Cridland, Deputy Director-General of the CBI, had this to say about the change in the rules:

“Changing the capital gains tax rate to a flat rate of 18% will adversely affect the balance between risk and reward, both for entrepreneurs and for the UK's vital private equity industry. This move is disappointing and may lead to a reduction in investment in start-up and growing businesses.”

Internet Links: HMRC notice and CBI statement

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