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Capital Gains Tax

The Chancellor&#39s pre-Budget report flagged the likely improvements to taper relief for business assets and changes to this relief have indeed been proposed (see below).



ANNUAL EXEMPTION



This is increased from £7,100 in 1999/2000 to £7,200 in 2000/2001 for individuals and personal representatives, and (in most cases) from £3,550 to £3,600 for trustees.




RATES OF TAX



It will be recalled that, in the last Budget, two rates of capital gains tax were introduced – 20% and 40%. The 20% rate applies where (and to the extent that) the capital gains (operating as the top slice of an individual&#39s taxable income) fall below the higher rate threshold.



As promised in the November pre-Budget report the 10% rate of income tax became applicable to savings income with effect from 6 April 1999. Corresponding changes have been made to capital gains tax from 6 April 2000 to keep it in line with the tax rates for savings.



For example, as a result of a long period of effective tax and financial planning John has taxable income (ie. after personal allowances and deductions) of £1,200. He then realises £37,800 of capital gains (after the annual CGT exemption).



John&#39s capital gains will be subject to tax as follows:-



£320 @ 10% (up to £1,520)


£26,880 @ 20% (up to £28,400)


£10,600 @ 40% (over £28,400)



Whilst particularly welcome in respect of income tax, it will be comparatively rare for an individual to have an intact (or partially intact) £1,500 10% tax band to set against capital gains in excess of the annual exemption.




CONTINUED PHASING OUT OF RETIREMENT RELIEF



With the introduction of taper relief in 1998, 1998/99 was the last year for which full retirement relief was available. The relief ends completely from 6 April 2003.



INCENTIVES FOR ENTREPRENEURIAL INVESTMENT IMPROVEMENT IN TAPER RELIEF



As indicated in the pre-Budget report the Chancellor has announced plans to dramatically improve tax relief for business owners. These include the following proposals:



 to shorten the business asset taper period from 10 years to 4 years



 to remove the bonus year of ownership for those who owned qualifying assets on 16 March 1998 which means that the ownership period to qualify for relief will start to run from 6 April 1998



 to reduce the number of voting shares that an individual needs to hold to qualify for the relief so that all shareholdings in unquoted trading companies, all shareholdings of employees in quoted trading companies and shareholdings held by outside investors in quoted trading companies above a 5% threshold will qualify as business assets. All employees, not just full-time employees, will benefit from these changes.



Unquoted companies for this purpose are defined as those which have no shares or securities listed on a recognised stock exchange. Shares traded on the AIM will be treated as unquoted.



The changes will apply to all disposals of qualifying assets after 5 April 2000 .



Currently, taper relief for business assets operates over a 10 year ownership period. This is summarised in the following table.




Taper Relief On Business Assets



Number of complete years after 5.4.98 for which asset held Percentage of gain chargeable Equivalent % tax rate for higher rate taxpayer



0


100


40


1 92.5 37


2 85 34


3 77.5 31


4 70 28


5 62.5 25


6 55 22


7 47.5 19


8 40 16


9 32.5 13


10 or more 25 10




It will be seen that if qualifying assets have been held for 10 years, then the effective rate of capital gains tax payable by a higher rate taxpayer on a gain made on a qualifying asset is 10%.



Under the new proposals the table for qualifying business assets will look like this:



Period asset held



Years


% of gain chargeable Effective rate of CGT for higher rate taxpayers


0-1 100% 40%


1-2 87.5% 35%


2-3 75% 30%


3-4 50% 20%


4> 25% 10%



It is felt that greater entrepreneurial investment will be encouraged by the reduction of the taper relief period to 4 years. As can be seen from the table a higher rate taxpaying individual who had owned qualifying assets for the full 4 years would pay an effective rate of 10%. Of course, the higher rate of tax would remain at 40%. Taper relief would operate to reduce the gains subject to tax and, thus, the effective rate of tax payable on the whole (unreduced) gain.




ANTI-AVOIDANCE MEASURES



Various anti-avoidance measures have been proposed and these are covered in detail elsewhere.

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