The new CGT flat rate will affect investors in varying ways, but small businesses are likely to be the biggest losers this time round.
The Government has now published draft legislation which confirms that from 6 April 2008, a flat rate of 18% will be charged on capital gains tax (CGT). The new system abolishes taper and indexation relief accrued pre-April 1998, potentially leaving many individuals with a far larger CGT charge than under the current system. Other reliefs and the annual exemption will remain available.
The impact on individual investors
There will be some relief for entrepreneurs selling a business and for directors or employees who own more than 5% of a trading company. To qualify, the business or shares will have to be owned for a minimum of one year. Provided the various conditions are met, the first £1m of gains will be taxed at an effective rate of 10%. Any gains over this amount will be charged at 18%. Many investors in unquoted trading companies who currently qualify for maximum taper relief (producing an effective tax rate of 10%) will see their potential tax liabilities increase by 80%.
These individuals may wish to consider triggering their gains before 6 April 2008 to capture a tax liability at the 10% rate. This could be done through an outright sale or by creating a tax disposal without losing control of the assets.
The new system will be beneficial to individuals who hold non-business assets, such as share and fund portfolios or investment property. Depending on the level of taper relief available, currently higher-rate taxpayers pay CGT at an effective rate of between 24-40% on such assets. After 5 April 2008, they will be liable at a reduced tax rate of 18%. These investors should therefore consider holding assets until after 6 April 2008.
Small businesses might lose out
The CGT rules are likely to influence individuals' future investment decisions.
From a CGT perspective, there is now less of a tax benefit for entrepreneurs and investors to invest in a potentially successful business, although the existing inheritance tax reliefs may still be of interest. Entrepreneurs may therefore be deterred and growing businesses may find it harder to attract funding. Investors will also have less tax incentive to hold onto their investments for the long term, so small companies could have less investor stability going forward.
Clearly, investors should base their decisions on investment grounds, but these new CGT rules should be borne in mind as they could affect investment returns considerably.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
