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Major reform of CGT

Fundamental changes have been proposed to the structure of capital gains tax. The Chancellor aims to encourage long-term investment by reducing the rate of CGT on longer-held assets.

The Chancellor particularly hopes to stimulate entrepreneurial activity by reward ing longer-term investment in businesses.

The annual exempt amount will be increased in line with indexation to £6,800 for 1998/ 99. Most trusts will be exempt on the first £3,400 of gains.

The main changes to the CGT system are:

Withdrawal of indexation after April 1998. For gains realised on or after April 6, indexation allowance will be given for periods up to April 1998 but not thereafter. So, for an asset held at April 6, 1998 and disposed of after that date, indexation allowance will be computed for the period from the date of acquisition to April 1998 but not for the period from April 1998 to the date of disposal.

The amount of a chargeable gain will be reduced according to the period for which the asset has been held after April 5, 1998.

The taper will be more generous for business assets than for non-business assets.

Gains on business assets that have been held for 10 years or more will be taxed at a rate of 10 per cent or less.

Retirement relief will be phased out over a five-year period from April 6, 1999 by a gradual reduction of the relief thresholds. The relief will cease to be available from April 6, 2003.

Rationalisation will take place in the charging structure for the gains of trustees and personal representatives of deceased persons. Gains realised on or after April 6, 1998 by these groups will be charged at the rate applicable to trusts, which is currently 34 per cent.

Acquisitions of shares and other securities are presently pooled. The individual acquisitions lose their identity in the pool, which is treated as a single asset with an overall average cost per share. But the introduction of the taper means that pooling will have to cease for acquisitions on or after April 6, 1998. This is necessary so that the time of each acquisition can be recorded and each treated separately. Companies are not affected by the CGT proposals as the Inland Revenue proposes a further review of how their capital gains are taxed.

The inheritance tax threshold will be raised by £8,000 from £215,000 to £223,000 for tax charges arising on or after April 6.

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