December 2007

From Taper Relief to Possible Retirement Relief

In last month’s enews we reported on the shock announcement in the Pre- Budget Report that capital gains tax taper relief and indexation allowance would be scrapped for disposals on or after 6 April 2008. Since then business leaders have been making representations to the Chancellor, Alistair Darling, to change his mind or to delay the introduction of the proposals which have significant implications for many taxpayers.

There have been rumours of the introduction of some form of retirement relief, with the figure of £100,000 being mentioned by several sources. Unfortunately as yet there are no concrete proposals. Chancellor Alistair Darling, speaking at the CBI conference on 27 November 2007, said:

“Simplification of the tax system is important because complexity brings increased costs.

I know that my proposals to introduce a single rate of capital gains tax have been controversial. That was inevitable.

We are working with the CBI and other business organisations to listen to what you have to say. I expect to publish final proposals in the next three weeks.”

What were the Pre-Budget proposals?
The changes announced in the Pre-Budget Report were that taper relief for capital gains tax (CGT) will be abolished for disposals on or after 6 April 2008. HMRC have issued several examples of how they envisage the rules working. At the same time as abolishing taper relief the government propose to change the rate of CGT to a flat rate of 18%.

Taper relief
Taper relief was introduced in 1998 and can significantly reduce the amount of any gain chargeable to CGT by as much as 75%. The percentage of the relief available depends on whether the asset is classed as a ‘business’ or ‘non-business’ asset and also the period of ownership of the asset since 1998.

To give a straightforward example, if today you sold some shares that you have owned for two years that have always been a business asset, then you would pay tax on the chargeable gain (basically, proceeds less cost less 75% taper relief). The remaining gain would be taxed at your top rate of tax of say 40%.

If you sell the same shares on or after 6 April 2008 taper relief will no longer be available to reduce the amount of the chargeable gain. The rate of tax applicable to chargeable gains will be changed from 6 April 2008 to 18%.

Inflation allowance
Another complication in current CGT computations is that if you have assets which you acquired before April 1998 you are currently allowed to include an element of inflation in your CGT computation. This inflation allowance, known as indexation, increases the cost of your asset and therefore reduces the amount of the chargeable gain for periods of ownership prior to April 1998. This relief will also no longer be available in computations for disposals on or after 6 April 2008.

These rules will generally increase the amount of tax payable by individuals who own assets that currently qualify for full business asset taper relief but everyone has different costs and entitlements to reliefs, so it is difficult to speak in generalities.

If the government does introduce a form of retirement relief then it may be beneficial to retain business assets and dispose of them on or after 6 April 2008 depending on the amount of the relief, the conditions which have to be met and how it is calculated.  

We will continue to keep you informed of developments. However if you have any concerns please do get in touch.

Internet Link:

Times article, Accounting Web article, CBI proposals and Speech