Capital Gains Tax

September 10th, 2010

Following the introduction of a flat-rate tax of 18% on Capital Gains introduced on 6 April 2008, one of the much anticipated tax changes in the run up to this year’s June Budget was a rise in Capital Gains Tax (CGT), with many fearing that the CGT rate could even be hiked up to 40 or 50% to prevent high earners exploiting the 18% CGT rate in preference to paying increased rates of income tax.

Although a rise in the Capital Gains Tax Rate was perhaps inevitable, fortunately the news was not as bad as originally predicted with the Chancellor announcing a rise in the CGT rate for disposals made on or after 23 June 2010 to 28% for higher rate taxpayers with the 18% CGT rate remaining for basic rate taxpayers.   The annual exempt amount of £10,100 for tax year 2010/11 remains so only gains in excess of this amount will be subject to tax.

So who exactly will be affected by this tax increase?

Contrary to the Chancellor’s inference that the 28% rate affects only higher rate taxpayers, individuals who are currently basic rate taxpayers could also be affected if they make significant capital gains – This is because any gains made on or after 23 June 2010 are now added to your taxable income for that tax year and any portion of the gain in excess of the basic rate income tax threshold (currently £37,400 for 2010/11) would be subject to tax at the higher rate of 28%.

Individuals who have income well below the basic rate income tax threshold could therefore easily be affected.  For example, the sale of a buy-to-let property (or any other valuable asset/investment for that matter) could result in a capital gain that, when added to your income, pushes you into the higher rate tax band.

Example:   John is a basic rate taxpayer as he has taxable income (after personal allowances) of £30,000.  On 30 June 2010, however, he sells shares he owns triggering a capital gain of £50,000.

The first £10,100 of this gain is free of tax as it is covered by the annual exempt amount mentioned earlier.

Of the remaining £39,900, the next £7,400 of this gain (taking him up to the basic rate tax threshold of £37,400) would be taxed at 18% but the remaining £32,500 (£39,900 – £7,400) would be subject to the higher rate of 28%!   This results in a total ‘effective’ tax rate of 21% whereas prior to the Budget announcements John would have just paid a flat-rate of 18% on the whole gain.

It is also important to remember that, where you have disposed of assets both before and after 23 June 2010 you will need to report these separately to ensure you don’t pay too much tax– Remember that any disposals made in the 2010/11 tax year but before this date will still only be liable for CGT at 18%!

It is also important to be aware that assets can be transferred between spouses without triggering a CGT liability – This is a useful way of making use of two annual exempt amounts by first transferring  assets to your spouse before each disposing of your share, enabling capital gains of up to £20,200 (2 x £10,100) before any tax is due.   In some circumstances this can also be a way of avoiding the 28% tax rate altogether

We can, however, only give a brief overview of these changes in this article.  Capital Gains Tax can be a complex area and it is therefore essential that you seek guidance from your Financial Adviser before taking any action, particularly if you are thinking of encashing investments or disposing of assets that could result in a capital gain.

Levels and bases of, and reliefs from, taxation are subject to change and taxation rates depend on the circumstances of the individual investor