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PBR 2007: Capital Gains Reform

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10th Oct 2007
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Capital Gains Tax (CGT) is going to be reformed for individuals, trustees and personal representatives, but not for companies. New measures will apply from 6th April 2008.
Finance Act 2008 will introduce a new single rate of 18% for CGT, and the following changes will be made to simplify the system:

  • The withdrawal of taper relief
  • The withdrawal of indexation allowances
  • The abolition of the "kink test" for assets held at 31 March 1982
  • Abolition of halving relief
  • Simplification of share identification rules

The 2008/09 annual exempt amount will be set during the 2008 Budget.

Other existing CGT reliefs will continue to be available for example:

  • Principal private residence relief
  • Business asset roll over relief
  • CGT relief under the VCT and EIS schemes
  • Business asset gift hold-over relief
  • Losses may still be carried forward

HMRC say that they will be discussing the consequential changes and draft legislation proposals with interested parties.

The rules will mean that the original cost of an asset will not be adjusted for past inflation any more. PBRN 17 gives several examples, unfortunately they do not show the effect of the change on the outright disposal of an existing business.

Example 1 Mr E
In 1995 Mr E purchased a holiday home in Devon for £100,000. He sells it in July 2008 for £250,000. His gain before deducting any unused annual exempt amount will now be £150,000.

Closer analysis...
Mr E, would if advised, consider making a PPR election as prior to sale. Under the new rules he loses all his indexation and taper relief. As an individual with no other taxable income he around £3,000 worse off under the new system.

If his house was in joint names, and he and his wife sell it with no other CGT reliefs then as basic rate taxpayers they are very badly off. They will pay tax at 18% on £131,600 (£150,000 less 2 x exempt amount) which comes to £23,688. If they can manage to achieve a sale before 6th April, then they would be paying tax on net gains of £30,800 each after indexation and taper adjustment. At basic rates there tax bill would be closer to £13,500. A saving of over £10K under the old rules.

The full tax effects will depend on the existence of other income, and the length of time that the assets was held. However, if Mr E and his wife are like many self-employed people who have brought an investment property as a retirement nest egg, the new regime is far from favourable.

Example 2 Mr G
The budget note does not give an example to show the drastic effects that can occur if one tries to sell a business to retire after 5th April 2008. Instead it gives an example of Mr G. who sells his shop and rolls over the gain. Naturally, he just ends up deferring the actual gain. No changes there.
What if Mr G established his business back in the 1980s? His indexation may be worth a material amount, and combined with business taper relief, he could find that under the new rules he is even worse off than Mr E above. This point is already subject to on-going debate in the Any Answers forum.

One has to query the adequacy of the Treasury's examples in PBRN 17, as they only show half the actual story. Cock-up or conspiracy?

The winners of this change are those with complex share transactions and those who aim to make short term gains on assets will no longer need to worry about holding periods.

Pre-Budget Report 2007:
At a glance guide

Pre-budget coverage sponsored by

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Replies (19)

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By glingley
10th Oct 2007 14:49

Appalling Spelling
Do you have a spell checker on your software?

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By John Snowden
10th Oct 2007 15:08

Appalling tax change
I wondered earlier in the year when the ridiculous controversy over private equity non-domiciled executives was raging whether taper relief would be chopped, but it seems unbelievable that it has been. After all, G Brown invented it, not some long-forgotten government of a different hue!

What with this measure, the increase in small company CT, the earlier fiasco with lower CT rates etc, one begins to fear for business property relief (and APR too).

Talking of which, what a (largely, if not entirelly) hollow gesture the IHT threshold increase is! And what about unmaried couples, siblings et al living together?

Wholeheartedly in favour of simplification but consistency and justice would be nice to have too.

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By davidcee
10th Oct 2007 21:54

Spelling?
Principle private residence relief

"principle" may be a correct spelling of the word, but I think you mean "principal" here.

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By Anonymous
10th Oct 2007 17:18

Pedant
Sorry to be a pedant (hey, isn't that why I'm an accountant?) but whoever released this article clearly doesn't know how to run SpellChecker before inflicting 'withdrwawl', 'kink tst', 'CGT releifs' etc on us poor unfortunates who are already fuming at the 80% hike in business asset CGT!!!

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By Anonymous
10th Oct 2007 17:46

Taper and CGT
I have just been working out the implications of dropping Taper relief on hotel owners who live on the premises and planned to sell their business to fund their retirement home.
Interesting times ahead for the industry I think....


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By Anonymous
10th Oct 2007 19:23

Speling
No excuses other than I was racing against the clock to get the Pre-budget wire out. Hope it reads a bit better now, and thank you for your patience.

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By AnonymousUser
11th Oct 2007 08:01

So what are the PPR rules now?
It looks as though the solution for 2nd (and more!) home owners is just a PPR election before you sell. What are the rules? (I'm particularly interested in couples who live in job-related accommodation - eg. clergy - and where the wife may own a 2nd home so that she has an income).

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By Barnwell Brewin
11th Oct 2007 08:58

You just have to smile
The government quietly and misleadingly slips in changes that have a massive financial implication for our clients and our own businesses and what is the immediate concern of most contributors?...Spelling!!

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By Anonymous
11th Oct 2007 22:02

Rollover claims will have to be reconsidered...
We will have to look closely at clients who have sold or intend to sell business assets prior to 5th April 2008 and who are considering making rollover claim as the deferred tax may be higher than it would have been had BATR remained in place.

For example client makes gains prior to 5th April 2008 of £200k. With rollover relief of £100k the CGT is £6,320. Consider then that the client disposes of new business asset for £200k in 2 years (Annual Exemption assumed £10k).

Had the rules not changed - CGT is £16,000 (Total £22,320)

With the Rollover claim - CGT is £34,200 (Total £40,520) +82%

Without the Rollover claim - CGT is £16,200 (Total £32,530) +46%

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By Anonymous
11th Oct 2007 12:56

PPR and second homes
You can make an a new PPR election within two years when you acquire a second home, if you want that to become your PPR.
If you don't do this, then your main home remains your PPR.
If your second home later becomes your PPR, then you can make a claim for it to be so, whenever it does so become, even if this is outside the two year time limit for the original election.

N.B.
Always take full professional advice to go through all the details before making any claims/elections of this nature.


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By AnonymousUser
11th Oct 2007 16:06

Plus ca change...
Trevor may be bewlidered, those of us who are getting to the stage where we have senior moments are really rather grateful. All I have to do is remember what the rules were when I first started in tax (far easier than remembering what they were last week) and just substitute 18% for 30%. Even share pooling has gone back to what it used to be.

The answer to the question is yes; the rate of CGT will be a single rate and independent of the rate of income tax.

Mike Truman

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By Anonymous
12th Oct 2007 15:31

QCBs
On the QCB point, I don't think the use of a QCB will help, since s116 requires you to freeze the chargeable gain (ie the gain before taper).

When the QCB is disposed of you then subject the frozen gain to tax (ie 18% and no taper post April 08 if the new rules are enacted as is).

S2A seems pretty clear that taper is applied to the chargeable gain, rather that a factor which is taken account of in working out the chargeable gain (see s2A(2)(a), for example).

Happy to be proven wrong however!

Not sure how you could "exchange" it anyway, since you'd need to fall within s127 and have a bona-fide commercial reason for the exchange...

Adam

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By kenmoody
15th Oct 2007 11:07

The corollary (or is coronary) to which ...
... I suppose could be to try and cash in the loan notes before April 2008 if possible and, if necessary, accept a simple debenture in exchange. Yes?

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By kenmoody
15th Oct 2007 11:00

The QCB point is very moot ...
.. as to whether if there is a share exchange pre-April 2008 the benefit of the taper relief accrued at the date of sale is preserved. It is true that the chargeable gain is treated as accruing at the date of redemption, but under para 16, Sch A1 the taper relief is calculated at the time of the exchange.

My assumption is that para 16 will be amended so that it will no longer apply to loan notes redeemed after 5/4/2008. This appears to be retrospective or at least retroactive taxation because people who have already sold their businesses by means of an exchange of securities thought that they knew what their maximum tax bill would be. I suppose that is no different to people who thought that their gain would be indexed up from March 1982, but at least we are talking about gains which haven't arisen yet. We won't know until we see the draft legislation but it's not looking too good, so whether the loan note is a QCB or a non-QCB the taxable gain post 5/4/2008 would appear to be the same.

For business sales pre 5/4/2008 it may well be that if the sale price cannot be paid up-front the best option may be a debenture secured on the company's assets, repayable by instalments. There is no deferral of liability but quite often sufficient of the instalments will have been received to pay the tax when it becomes due and this may result in a lower liability than taking loan notes.

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By kenmoody
15th Oct 2007 14:59

Daren's idea ...
... of a sale to an IIP is one which I'm trying flesh out, with a view to using it. A gift to an IIP will, I think, be a chargeable transfer for post 22/3/06 trusts as s49(1) which treats the beneficiary as entitled to underlying assets will not apply. I'll gladly defer to trust experts here but I think that's broadly it. If BPR applies I assume there is no problem with, say, a gift of shares going into settlement, but there would be an exit charge I think. You probably are not going to do this unless a sale is in prospect so the exit is likely to be soon. The IHT may not be that significant but would need to be worked out.

On the sale idea, again if we are talking about shares, there will be stamp duty at 1/2 %, but I am assuming that if the shares are sold for full market value there is no transfer of value and so no IHT.

So I guess it comes down to balancing an IHT exit charge with any SD payable.

I'll now shut up and give someone else a go.

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By Robert Clubb
15th Oct 2007 15:39

Lettings Relief
Have been out of the country and have come back to try and catch up on this 'wonderful' new idea!

Am I correct in assuming that Lettings Relief (for the last 48 months of letting of a PPR) has not been withdrawn?

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By Anonymous
15th Oct 2007 16:39

Lettings Relief????
Robert - surely you mean last 36 months as an extension of PPR?

Lettings relief is lower of £40,000 etc etc

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By Robert Clubb
15th Oct 2007 17:05

OK....but!
Yeah, 36 month normally, but 48 months where duties of a UK employment require taxppayer to live elsewhere.

Either way, is Darling tinkering with this at all?

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By kenmoody
16th Oct 2007 11:07

We seem to be getting a bit off topic here ...
... but I think you are confusing two different issues. The 4 year period in relation to the duties of an employment applies if there was a period of residence both before and after the period of absence. The exemption for the last 36 months applies regardless as long as the property was at some time the PPR. So if you were prevented from occupying as a result of an employment elsewhere in the UK and say you were away for three years, if you never resume residence the relief for an absence up to 4 years cannot apply but the relief for the last 36 months. If you did resume residence then both would apply i.e. they overlap.

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