CGT: the legal implications
THE initial collective sigh of relief following the chancellor’s announcement of the limited rise in the capital gains tax rate to 28 per cent for higher rate earners has given way to the noise of tapping calculators and the scratching of heads as the number crunchers endeavour to work out exactly who the winners and losers will be.
The measure goes some way to achieve the chancellor’s objective of raising the capital gains tax rate without compromising simplicity, but the absence of taper relief (rewarding long term investment), or indexation allowance (countering inflation) means that the burden of the rate change will fall squarely on those who have long-term holdings with low base costs.
For those with liquid assets such as quoted shareholdings, it may be possible to orchestrate carefully-timed asset sales in tranches, so as to remain under the higher rate threshold or within the annual capital gains tax free allowance year on year. For others with less easily divisible assets such as a second home, it may be possible to mirror this strategy by making gifts or sales of a share in the asset to family members to prevent the entire gain accruing in one year – but always with an eye on the inheritance tax implications of gifts.
We have seen an increased focus on how to qualify for entrepreneurs’ relief, which reduces the rate of tax on the disposal of certain business assets to 10 per cent. This was introduced in 2008 when the 18 per cent flat rate was implemented, and the lifetime allowance for this relief has been increased to £5m.
While this may encourage long-term investment in business, it falls far short of the business asset taper relief available in the relevant years up to 2008, and it is unlikely to assist many taxpayers who receive shares in the company for which they work as part of their remuneration, because of shareholding/voting threshold requirements for the relief.
So how will the new rate operate? The draft legislation has now been published,
containing the expected transitional provisions to accommodate the mid-year rate
increase, which takes effect for gains arising on or after 23 June 2010.
Basic rate tax payers will continue to pay capital gains tax at 18 per cent. Once the basic rate band limit is reached (the threshold is determined by adding the amount of the gain to an individual’s taxable income for the year), the balance of any gain will be taxable at 28 per cent. Higher-rate tax payers will automatically pay tax at 28 per cent on the entire gain, as will trustees and personal representatives. Gains which arose before 23 June will not be treated as using up the basic rate band for the purposes of determining the rate at which subsequent gains will be taxed.
For UK resident but non-UK domiciled individuals (so-called non-doms) who opt to be taxed on the remittance basis, gains remitted to the UK are treated as arising at the time they are remitted, so gains arising before 23 June but remitted on or after that date will be taxed at 28 per cent. There are also transitional provisions relating to gains made in offshore trusts, adding further complexity to already complicated rules.
It was thought that closer alignment between capital gains and income tax rates would have prevented further erosion of the income tax base by discouraging people from exploiting the differential between the rates. However, the government said its research indicated that a greater increase would have led to an overall fall in tax receipts. For some, therefore, it may remain attractive to generate capital gains rather than income where possible, and the industry which exploits this arbitrage is bound to remain active for the time being.
Emma-Jane Weider and Sophie Mazzier are respectively a partner and a counsel at law firm Maurice Turnor Gardner LLP