Pre-Budget 2007 - How it affects YOU
Capital Gains
Tax
The Government announced in the Pre Budget report (PBR) that
it intends to abolish some capital gains tax reliefs and replace
them with a flat rate of 18% for gains exceeding the annual
allowance. The proposals will be sent out for consultation by
HM Revenue and Customs, but as they currently exist they could
influence your plans to sell before or after April 2008.
Although these proposals may impact on you if you are selling
property, shares or other assets, you will also need to consider
them if you are intending to hold onto-your property, shares
in your company or other assets. There may also be action
you could take before April 2008 to make use of the current reliefs
available.
Broadly, if the proposals are implemented as they currently
stand, it will mean that, after 6 April 2008, individuals
who sell non-business assets will be subject to less tax,
while those selling business assets are likely to be liable
for significantly higher Capital Gains Tax bills. There are
however exceptions to this generalisation due mainly to the
abolition of indexation allowance and taper relief for assets
sold after 5 April 2008.
The regime for charging companies corporation tax on their
chargeable gains has not been changed so they will still
be entitled to indexation allowance but not taper relief.
The following information may be appropriate for some individuals:
- Those running a trading company who are currently questioning
if they should continue trading as a limited company
and who are entitled to business asset taper relief on the
sale of the company may consider dis-incorporation to take
advantage of indexation up to March 1998 and taper relief (75%
if asset owned for two years) then continuing to run the business
as a sole trader or partnership.
- Individuals who have held assets like properties for
some time and who are considering if they should trade through
a company in the future may wish to consider accelerating
that decision.
- For individuals considering selling an asset which is
subject to capital gains tax in the near future, the
capital gains tax should be calculated under both the old and
new systems so that the individual can decide whether to sell
before or after 5 April 2008.
Relief not affected
- principal private residence relief
- business asset rollover
- enterprise Investment Scheme and Venture Capital Trusts
- business asset gift hold over relief
- losses brought forward
Please note in each of the examples the following assumptions
have been made:
The annual exemption is not yet known and will be announced
in the 2008 Budget, so for illustration the 2007/08 figure has
been used it has been assumed that there are no other gains in
2007/08 or 2008/09 for the purposes of illustration, tax rates
and allowances have not been altered
prior to April 2008, gains are treated as a top layer of income,
but this will no longer be the case from 6 April 2008.
We advise you to contact your relationship partner to discuss
these matters in more detail but for your information we have
highlighted a few common examples below. Examples two to five
show how changes in circumstance would result in different
decisions based on the tax consequences.
Example 1: 40% taxpayer selling a business asset
A sole director/shareholder set up the company in August 1982.
The shares were issued at a cost of £20,000. The shares
will be sold in April 2008 for £250,000. Indexation is £20,940
(cost multiplied by 1.047). Taper relief £156,795. You
are a 40% taxpayer and make no other disposals.
If it is sold before April 2008, the gain will be (£250,000
less indexation £20,940 less taper relief £156,795
less cost £20,000 less annual exemption £9,200 =) £43,065
chargeable at 40% = £17,226.
If sold after then, the gain will be (£250,000 less cost £20,000
less annual exemption £9,200 =) £220,800 chargeable
at 18%= £39,744.
A delay in sale would result in a higher tax charge of £22,518.
Example 2: 40% taxpayer selling a non-business asset (1982
market value)
A property was bought in 1978 for £34,000. Its market value
in 1982 was £25,000. Indexation is £35,598 (higher
of £34,000 and £25,000 multiplied by 1.047). Taper
relief £112,160. Sale proceeds will be £350,000.
You are a 40% tax payer and make no other disposals. The option
to use cost of an asset owned before March 1982 has been abolished
from 6 April 2008.
If it is sold before April 2008, the gain will be (£350,000
less indexation £35,598 less taper relief £112,160
less cost £34,000 less annual exemption £9,200 =) £159,042,
chargeable at 40% = £63,617.
If sold after then, the gain will be (£350,000 less market
value March 1982 £25,000 less annual exemption£ 9,200
=) £315,800 chargeable at 18% = £56,844.
A delay in sale would result in a lower tax charge of £6,773.
Example 3: 40% tax payer selling a non-business asset (1982
market value)
A property was bought in 1978 for £34,000. Its market value
in 1982 was £70,000. Indexation is £73,290. (Higher
of £34,000 and £70,000 multiplied by 1.047). Taper
relief £82,684. Sale proceeds will be £350,000. You
are a 40% tax payer and make no other disposals. The option to
use cost of an asset owned before March 1982 has been abolished
from 6 April 2008.
If it is sold before April 2008, the gain will be (£350,000
less indexation £73,290 less taper relief £82,684
less market value £70,000 less annual exemption£ 9,200
=) £114,826, chargeable at 40% = £45,930.
If sold after then, the gain will be (£350,000 less market
value March 1982 £70,000 less annual exemption £9,200=) £270,800
chargeable at 18% = £48,744.
A delay in sale would result in a higher tax charge of £2,814.
Example
4: 40% tax payer selling a non-business asset
A holiday home used solely by the owner and his family was
bought in June 1996 for £80,000 to be sold in April 2008 for £265,000.
Indexation is £5,040 (cost multiplied by 0.063). Taper
relief £71,984. You are a 40% tax payer and make no other
disposals.
If it is sold before April 2008, the gain will be (£265,000
less indexation £5,040 less taper relief £71,984
less cost £80,000 less annual exemption £9,200=) £98,776
chargeable at 40% = £39,510.
If sold after then, the gain will be (£265,000 less cost £80,000
less annual exemption £9,200=) £175,800 chargeable
at 18% = £31,644.
A delay in sale would result in a lower tax charge of £7,866.
Example
5: 40% tax payer selling a non-business asset
A property was bought in November 1985 for £140,000 to
be sold in April 2008 for £400,000. Indexation is £97,300.
(Cost £140,000 multiplied by 0.695). Taper relief £65,080.
You are a 40% tax payer and make no other disposals.
If it is sold before April 2008, the gain will be (£400,000
less indexation £97,300 less taper relief £65,080
less cost £140,000 less annual exemption £9,200 =) £88,420,
chargeable at 40% = £35,368.
If sold after then, the gain will be (£400,000 less cost £140,000
less annual exemption £9,200 =) £250,800 chargeable
at 18%= £45,144.
A delay in sale would result in a higher tax charge of £9,776.
Capital Allowances
Revised Capital Allowances will be introduced after 31 March
2008
Small businesses will be entitled to 100% write off in the
first year on qualifying expenditure of up to £50,000. After
that amount, and that date, the annual writing down allowance
falls from 25% to 20%.
Please discuss with us any plans for capital expenditure that
will be affected by the tax changes that are proposed.
