The Conservative-Liberal Democrat coalition government has announced that it will raise capital gains tax (CGT) from the current rate of 18% to rates "similar or close to those applied to income, with generous exemptions for entrepreneurial activities."
- What could the new rates be? A top rate of 40% looks likely.
- What assets would benefit from the "generous exemptions"? This is the key question: we think the exemptions will be wider than the current entrepreneur's relief, hopefully including employee shareholdings and unquoted shares.
- Could the annual exemption (currently £10,100) be reduced? There's no information on this, but reducing the exemption would make many more people liable to CGT.
- When will the changes take effect? Probably April 2011, but an earlier date, perhaps even 22 June, cannot be ruled out.
Only the Chancellor and his Treasury team know the answers to these questions, and judging by the press comment, it's quite possible that the details are still being worked on, before they're revealed on 22 June.
Much of the speculation has revolved around the LibDem manifesto, which proposed taxing capital gains at income tax rates, re-introducing indexation relief to reduce the impact of inflation and reducing the annual allowance. However, comments by ministers and others make it clear that the final policy will be a blend of ideas from both coalition parties.
The key types of asset likely to be affected by an increase in rates will include:
- Property, such as buy-to-let and second houses
- Quoted shares
- Chattels, fine art, antiques etc
In each of these cases, it is likely that a higher rate of CGT will apply.
What could Entrepreneurial activities mean?
Entrepreneur's relief currently applies (broadly) to shares in companies where the taxpayer owns more than 5% of the company and is an officer or employee, and to gains made on the disposal of a business carried on in partnership or as a sole trader.
The definition of entrepreneurial business activities for the new legislation is not known - but we hope will be much broader than the entrepreneur's relief definiton. It is possible that a more generous regime may apply to employee shares, to all shares in unquoted companies, and possibly to gains on furnished holiday lettings. However, the precise rules are not known and this is merely speculation at this stage.
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