The Government have taken the 2003 Budget as an opportunity to undertake some simplification and improvement to the capital gains tax (CGT) rules as well as to counter some specific tax avoidance schemes that exist by exploiting the rules that apply to second hand endowment policies and offshore trusts.
5.1 CGT SIMPLIFICATION
The Chancellor announced proposals for simplification in the following areas:-
- the reporting requirements for chargeable gains;
- definition of business assets for taper relief;
- the CGT treatment of monthly savings schemes for company shares and unit trusts;
- carry back of losses on rights to unascertainable deferred consideration; and
- treatment of certain "earn-out" rights as securities.
(i) Reporting Requirements For Chargeable Gains
There will in future be fewer circumstances where individuals, trustees and personal representatives of deceased individuals will need to complete the CGT pages of a tax return.
Under the current rules, individuals and personal representatives do not normally have to complete the CGT pages if:
- their chargeable gains for the tax year in question do not in total exceed the annual exempt amount (AEA); and
- the total of their proceeds from disposals in the year of assets which are not CGT-exempt does not exceed twice the AEA (this is referred to as "the disposal proceeds limit").
Although similar provisions apply to trustees of settlements, it must be borne in mind that the AEA available to trustees is usually half the amount available to individuals and personal representatives. Exceptions to this are certain trusts for the disabled, for which the full AEA is available and where one settlor has created more than one trust so that the trust is entitled to less than half the AEA.
Under the new proposals, the disposal proceeds limit will in all cases be increased to four times the AEA which applies to individuals.
This will mean that individuals, trustees of settlements and personal representatives will not normally have to complete the CGT pages of their tax returns if:
- the total of their proceeds from disposals in the tax year in question of assets which are not CGT-exempt does not exceed the new disposal proceeds limit; and
- their chargeable gains for that year do not in total exceed their AEA;
- there are no allowable losses which must be deducted from their chargeable gains and there is no CGT liability after any available taper relief has been applied.
Transfers of assets between spouses will not count towards the disposal proceeds limit, provided they are treated as having been made under the "no gain, no loss" rules (ie the couple are living together as husband and wife).
(ii) Taper Relief: Definition Of Business Assets
The rules which determine whether assets other than shares or securities qualify as business assets for CGT taper relief purposes are to be relaxed so that a wider range of assets will qualify.
For periods of ownership from 6th April, 2004 onwards, assets used wholly or partly for the purposes of trades carried on by individuals, trustees of settlements, personal representatives or certain partnerships will qualify as business assets, irrespective of whether the owner of the asset is involved in carrying on the trade concerned.
Everything that qualifies as a business asset under the current rules will qualify as a business asset under the new rules. The main change is that an asset owned by an individual, the trustees of a settlement or the personal representatives of a deceased person, will qualify as a business asset under the revised rules at any time when it is used wholly or partly for the purposes of a trade carried on by certain individuals, partnerships, trustees or personal representatives.
(iii) Monthly Schemes For Company Shares And Units In Unit Trusts
Calculating capital gains and losses arising on disposals of shares and units can be a complicated and time-consuming task if the holding has been built up through several acquisitions, as is the case where investments are made via a monthly savings scheme.
To address this problem new guidance will be available to help with the calculation of CGT liabilities when disposals are made of shares or units acquired through such a scheme.
The guidance will be published on the Inland Revenue web-site in time for people who need to report their gains and losses for the tax year 2002-03. In due course it will be revised and published as a CGT Help Sheet to accompany the guidance for completing the Capital Gains pages of the tax return for the tax year 2003-04.
The new guidance will help investors understand the CGT rules and work out their gains and losses and will supplement that given in the Inland Revenue Statement of Practice SP2/99. It is currently being prepared in consultation with taxpayers' representative bodies.
(iv) Carry Back Of Losses On Rights To Unascertainable Deferred Consideration
A "right to unascertainable deferred consideration" is a right to future payments if the amount of the payment in question could not be determined at the time it arises, ie. when an asset is disposed of wholly or partly for such a right. The market value of such a right at the time of the disposal of the original asset is included in the calculation of the gain arising on the disposal of that asset. If the right itself is disposed of in a later tax year and a loss arises (by reference to the original market value of the right) the loss cannot normally be set off against the gain on the original asset (because it had taken place in an earlier tax year).
Following proposals in the Budget, in certain circumstances when such a loss occurs on after 10th April, 2003, a taxpayer will be able to elect for an allowable loss which arises in one tax year to be treated for CGT purposes as though it arose in an in earlier year, provided:-
- the loss must arise on a disposal of a right to unascertainable deferred consideration;
- the person must not have acquired the right second-hand;
- a disposal of the original asset for which the right was received must have given rise to a chargeable gain; and
- the person must have had a CGT liability for the tax year in which that disposal was made.
This will not apply to rights acquired by companies liable to corporation tax on their chargeable gains.
Special provisions apply where part-disposals of the original asset have arisen in different tax years and to part of a loss which is not set off against gains of the year in which it is treated as having arisen.
(v) Treatment Of Certain "Earn Out" Rights As Securities
Currently, if certain conditions are met a person who sells shares in, or debentures of, one company to another company wholly or partly for an earn-out right may elect under section 138A of the TCGA for the right to be treated as a security of the purchasing company. Where an election has been made in relation to an earn-out right which is later replaced by a new earn-out right, a further election may be made under section 138A (provided that certain conditions are met) for the new right also to be treated as a security.
Where an earn-out right is treated as a security and new shares or debentures are issued under the terms of the right, the broad effect is that the new shares or debentures are treated as the same asset as the original shares or debentures. This means that, to the extent that this treatment applies, no charge to tax arises on any gain until the new shares or debentures are eventually disposed of.
The Government proposes to simplify this situation by reducing the need for many taxpayers to make an election. In future an earn-out right will automatically be treated as a security of the purchasing company if the conditions are met unless the person on whom it was conferred elects otherwise. In most circumstances, people benefit from electing for earn-out rights to be treated as securities. Treating such rights as securities automatically where the relevant conditions are met will, therefore, be helpful to most people. But the minority who would not benefit will be able to opt out by making an election under the new rules.