Pre-Budget Report 2007 Proposals; Capital Gains Tax

You may have read in the press that the Government are proposing a revision of the Capital Gains Tax (CGT) legislation from 6 April 2008.

The Government would like to simplify CGT calculations for  individuals, trustees and personal representatives. They are proposing the withdrawal of indexation and taper relief. Instead there would be a flat rate of 18% tax charged on all capital gains made, irrespective of the length of time the asset has been held and the type of asset.

In making the capital gain calculation, assets held on 31 March 1982 will be deemed to have an acquisition cost equivalent to their market value on that day.

The Chancellor, Alistair Darling, is also proposing to change the tax rules for certain non-domiciled individuals, to increase the tax revenue for the Government.

Capital Gains Tax
Mr Darling is proposing to change CGT legislation from April 2008.

The main changes outlined are:

• Indexation allowance is to be removed. This is the relief that is applied to assets held pre-April 1998. This could greatly increase the capital gain for investments held for a long time.

• Mr Darling has also proposed removing taper relief. Taper relief can reduce the potential gain on business assets held for more than 2 years by 75%.  There is a significant but lesser reduction for non-business assets.

• The loss of business asset taper relief will affect investors with shares held in unquoted companies or companies that are quoted on the AIM and PLUS exchanges.

The removal of business asset taper relief will also increase the CGT burden on small business owners hoping to sell their businesses in their retirement.

• The Government is proposing one flat rate of 18% tax on all capital gains irrespective of other income.

Domicile Review
Currently non-domiciled residents within the UK pay tax only on income remitted into the UK.

The Government is proposing to change these rules so that anyone resident in the UK for 7 years will be liable to tax on foreign as well as UK income.

Non-domiciled residents will, however, have a choice of paying tax on foreign income and gain, or paying a £30,000 annual charge, as well as the tax on their UK remitted income (but without the benefit of personal allowances). There are to be exemptions for de minimus amounts.

When deciding if an individual is resident in the UK for tax purposes HMRC do not currently count the day they arrive in or depart from the UK. That will change on and after 6 April 2008 for residence test purposes.

Recommendations
Although the points raised in the pre-budget report are currently only proposals, individuals with business assets, e.g. AIM or unquoted shares, could look into whether it would be cost effective to dispose of these shares prior to April 2008. 

It should be noted that shares defined as business assets are currently outside the scope of Inheritance Tax, and this should be taken into account when weighing up the benefits of acting before April 2008.

It is possible, though no plans have yet been announced, that the Government may allow a retirement relief for owners of small businesses.

Higher rate tax payers with quoted shares or second homes could find that they benefit from the new CGT regime.

Generally the advice is to review matters thoroughly and well before 6 April 2008.

For any further information or advice please contact:
Nicola Cubbon
e: nicola.cubbon@warners-solicitors.co.uk
t: 01732 378982