The Chancellor has today announced that two Capital Gains Tax ("CGT") changes will come into effect for all CGT disposals made by individuals after midnight tonight. While there has, as expected, been a rise in CGT rates, many will be relieved to hear that this was not as severe as had widely been predicted. Indeed, some taxpayers may even be celebrating a reduced tax bill from an increase in the limit of entrepreneurs' relief.
The rate of capital gains tax will rise from 18% to 28% for individuals with total taxable income and gains in excess of the income tax basic rate band (for the current tax year, this will apply to the extent the total income and gains exceed £37,400). Those with income and gains below that amount will continue to pay capital gains tax at 18%. The annual exemption (currently set at £10,100) remains. While this does represent an actual rise in rates of tax, this will come as a relief to many who feared that the rate of capital gains tax could have risen to the corresponding rates for income tax, namely 40 or 50%. A considerable differential between the rates of CGT and the rates of income tax remains, which will therefore continue to fuel the desire to have profits taxed as capital receipts rather than employment or trading income.
Individuals that qualify for the lower 10% rate of capital gains tax on the disposal of certain business assets (by virtue of "entrepreneurs' relief") will be pleased to see that the extent of that relief has been extended. Entrepreneurs' relief applies so that an effective 10% rate of CGT is available on the disposal of qualifying holdings in trading companies, where the shareholder is an employee or director of the company. Prior to today's announcement, the 10% rate was restricted to a lifetime limit of £2 million of capital gains. However, for disposals taking place from tomorrow onwards, this limit has been increased to £5 million. The mechanism for providing such relief has also been altered to allow for the differing rates of capital gains tax.
The date of disposal for CGT purposes occurs on the date of an unconditional agreement to sell (assuming that the agreement is completed in due course). Therefore those who have already entered into unconditional agreements to dispose of capital assets will remain subject to the old regime.
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The original publication date for this article was 22/06/2010.