Following consultation, the Government have announced a series of measures designed to simplify CGT. The main proposals are as follows:-
(a) Business asset relief and incorporation
When a self employed business incorporates, “incorporation” relief exists to prevent a CGT charge arising. Basically all existing capital gains of the business are rolled over into the shares of the company. However, this does mean that if the shares of the company are sold quite soon afterwards, that business asset taper relief will be restricted to the ownership period of the shares which would be much less than that which would have been available on the sale of the (unincorporated) business.
To address this problem, the Chancellor proposes that people will be able to opt out of incorporation relief meaning that CGT will be chargeable on the transfer of the assets to the company and thus potentially mean that a high level of taper relief can be secured. Which course will be most appropriate in any particular case will, of course, depend on the facts.
(b) Acquisition of shares by employees under different employee share schemes.
Currently the CGT rules treat all shares of the same class in the same company which a person acquires on one day as though they were acquired in one transaction. For example, if a person acquired 1,000 shares in the company under one share scheme and 2,000 shares under another share scheme, and disposes of 600 of those shares, he or she is treated as disposing of 200 of the shares acquired under the first scheme and 400 of the shares acquired under the second scheme ie. the combined disposal is apportioned in accordance with the number of shares acquired.
The Government propose that, with effect from 6 April 2002, people will be able to elect that shares with a smaller capital gain are disposed of in priority to those that would give rise to a larger capital gain.
The proposed election will divide the shares acquired on a single day into two categories. Shares in the category which, broadly, give rise to smaller gains (because their cost for CGT is the same as their value on acquisition and not, for example, a lower cost provided for under the rules of a particular employee share scheme) will be treated as being disposed of before shares in the other category.
(c) Deemed securities and taper relief
The Chancellor proposes certain loan notes that are securities for certain purposes of CGT will also be treated as securities for taper relief, and will benefit from business assets taper relief where appropriate.
Under the current law certain debentures received on certain share or security exchanges on corporate mergers etc are deemed to be securities for limited purposes of CGT. The proposal will provide that these deemed securities will also be treated as securities for taper relief purposes. So when deciding whether the debentures are business assets for taper relief (and for certain anti-avoidance rules) the rules for shares and securities will apply.
It is also proposed that legislative effect will be given to the rules which apply where shares or debentures in one company are issued in exchange for those in another company and will be extended to apply to companies without share capital.
There will also be certain technical changes in definitions for business assets taper relief, for example, the definition of holding company.
(d) Trading losses and taper relief
Currently relief can be claimed for certain trading losses to be deducted from gains chargeable to CGT which arose in the same tax year that the losses arose and/or the previous year. The maximum amount that may be deducted is limited to what the chargeable gain would have been after taper relief. The Chancellor proposes that eligible trading losses may be set against the gains chargeable to CGT before taper relief is applied. This will mean that the maximum amount will be worked out by reference to the chargeable gain before taper relief is applied.
(e) Personal losses and attributed trust gains
Under the current rules, where the settlor of a trust has or is treated as having an interest in the trust, the tapered gains of the trustees will be attributed to him.
The Chancellor proposes that in future amounts attributed to these settlors will normally be in respect of the untapered gains of the trustees (after trust losses have been deducted, where applicable). The settlor will set personal losses first against personal gains and then against the attributed amounts. The taper relief that would have been applied by the trustees will instead be applied to the net attributed amounts.
The new measure will not apply in certain cases where amounts are attributed to a settlor who has been temporarily non-resident and returns to the UK.
(f) Deeds of variation
Currently where a person wishes to vary the provisions of a deceased person's Will, then to be effective for IHT purposes, he must make that variation within 2 years of the death and he must make a suitable election within 6 months of the date of the variation. If he wishes to avoid the variation giving rise to a CGT disposal (and so ensure that for CGT purposes the assets pass at their value on the deceased's death) he must also make a CGT election under section 62(6) TCGA 1992.
Both these provisions currently apply only if all those making the variation send in a formal election to that effect within 6 months. Under the Chancellor's proposed provisions, an otherwise valid instrument of variation which states what provisions are intended to apply will have effect automatically without the need for an election.