Capital gains tax and the Pre-Budget report: your questions answered

11/10/2007

Paul Farrow answers your questions about capital gains tax (CGT)
· Pre-Budget Report coverage in full

What is the current rate of CGT?
At the moment the actual rate of CGT you pay is determined by your top rate of income tax. So for higher rate taxpayers you will pay 40 per cent CGT in the 2007/8 tax year and lower rate taxpayers will only pay CGT at 20 per cent. But you can also pay as little as 5 per cent depending on the assets you are disposing of.

But isn't there taper relief that reduces my CGT bill?
Yes. There is taper relief that can help you reduce your CGT bill. If your chargeable gains after allowable losses are more than the annual exempt amount for the year you can qualify for taper relief, which is calculated depending on how long the asset has been held. The longer the asset has been held the more relief you will get - after 10 years only 60 per cent of the gains are chargeable to CGT. This tapering can reduce the effective rate of CGT to 12 per cent for basic rate taxpayers and 24 per cent to higher rate taxpayers after a decade.

So what's changing?
The current system is being scrapped from April 5, 2008. The Chancellor, Alistair Darling, has decided to move to a single rate of CGT for everyone which will be paid 18 per cent.

What is happening with the CGT exemption limit?
It is staying put. Everyone will still get a CGT allowance, which is £9,200 for the current tax-year and any gains up to the limit are tax-free. The limit is likely to be increased next year.

I own a second home. Does that mean I will pay less tax when I sell-up?
Yes. You will are likely to be a winner with the new system. At the moment the minimum CGT you will pay on the chargeable gain is 24 per cent, but it could be more depending on how long you have owned the property - if you have been a landlord for less than three years you face a CGT bill paid at 40 per cent. From next April you will only pay 18 per cent - irrespective of how long you have owned your property. However, if you are a basic rate tax payer you may pay more. For example, a basic rate taxpayer who has held a buy-to-let property for 9 years will pay CGT at 18 per cent, rather than 13 per cent.

I own a second property but it is a holiday let? Does that make a loser or a winner when I come to sell it?
A loser I'm afraid. If you own a qualifying furnished holiday let it is a business asset and so you will pay CGT at 18 per cent, rather than the current 10 per cent as a higher rate taxpayer.

I have an investment portfolio. Will I pay less tax when I sell my shares?
Yes - providing they are fully listed shares. You will pay CGT on the chargeable gain at 18 per cent, rather than a minimum of 24 per cent. But the new rules will disadvantage owners of qualifying "trading assets", such as unincorporated business or Aim listed shares in unlisted trading companies. The effective tax rate after two years of ownership which, after business asset taper relief, until now has been only 10 per cent, will now increase significantly to 18 per cent. This will impact employee shareholders - so if you work at Tesco and are a member of its share scheme CGT will be paid at 18 per cent.

I own an Aim share portfolio to shelter inheritance tax. How will the change affect me?
Provided you have held shares which are eligible for business asset taper relief are held for a minimum of two years, the original investment - plus any subsequent growth - will fall continue to fall outside your estate for IHT. However, if you dispose of your shares after two years you will have to pay CGT at 18 per cent after April 2008, rather than the 10 per cent you would today as a higher rate taxpayer. Those with smaller estates may decide that an Aim portfolio is not worthwhile now that the IHT threshold limit for couples has been increased to £600,000.

What about VCTs and EISs? Will they be affected by the new system?
If you took advantage of the old rules that allowed you to defer your capital gains by investing in a VCT pre-2004 you will be a winner. Before you were looking a tax bill of 40 per cent, but now you will pay just 18 per cent.
The message from the experts is, if you were thinking of liquidating your VCT don't do it until after April 5 2008. Those who rolled over capital gains with a 10 per cent tax charge into Enterprise Investment Scheme shares will suffer. When they sell the EIS shares, the rolled over gain will be taxed at 18 per cent rather than at the 10 per cent they would have paid had they not done the roll over in the first place. Gains made on the EIS itself remain CGT free.