Are you a winner or a loser in the new CGT regime?

The big surprise in the Pre-Budget Report was the new 18% rate of capital gains tax (CGT) which will apply to gains made by individuals and trustees from 6 April 2008.

Currently gains are treated as the top slice of income which often means a 40% tax rate. However if ‘business assets’ are sold the capital gain may be discounted by 75% due to taper relief. That works out at just 10% tax for a higher rate taxpayer or 5% for a basic rate taxpayer.

Taper relief will not be given for disposals on or after 6 April 2008. If ‘non-business assets’ are sold the maximum discount is 40% which works out at an effective rate of 24% for higher rate taxpayers or 12% for basic rate taxpayers. So there are winners and losers in the new regime.

Note that the annual exemption (currently £9,200) will continue to apply to remove the first slice of gains from CGT.

Do your assets currently qualify for full taper relief?

Where an asset comes within the definition of a business asset, it qualifies for a maximum taper relief of 75% after just two complete years of ownership. The three most common types of asset which qualify are:

• assets which are used in a trade, for example a property
• any shareholding in an unquoted trading company (provided that the company satisfies the CGT definition of a trading company)
• any shareholding in a quoted company of which the shareholder is an employee or director.

The definitions of a business asset are complicated so please talk to us if you require confirmation regarding the status of your assets.

Can you do anything to crystallise your entitlement to business asset taper relief?

Clearly if you are considering selling business assets, it may be better to do so now. A much more difficult question is whether it is possible to sell the asset to obtain the taper relief but retain ownership in a different form. The main example of when this may be practical would be if a property held personally is used by a company in which you are the main shareholder. The sale of the property to the company will crystallise the taper relief (and in respect of that gain a tax bill) but the company will acquire the property with a base cost equal to the current market value of the asset. There are however many other issues to consider, so you will need to talk to us.

You have an investment property. Will you win or lose?

Some investment properties qualify as business assets and so you are a likely loser unless the asset is sold before April 2008. Examples are assets used by a trade (as explained above) and ‘holiday lets’. But owners of second homes and buy to let properties are likely to be winners. The 24% effective tax rate which is derived from the maximum non business taper relief is only given for property bought before 17 March 1998. Your taper relief may therefore be less, giving an even higher effective tax rate.

However, owners of investment properties originally acquired well before 1998 also need to consider the effect of the loss of indexation allowance from 6 April 2008. Indexation allowance only applies if assets were acquired prior to 6 April 1998. The effect is to uplift the cost of the asset to reflect general inflation from the date of acquisition to April 1998. An asset purchased in September 1988 for example would qualify for a 50% uplift to cost if sold before April 2008. So if you have an investment property with a relatively high base cost, indexation allowance may reduce your effective rate to below the 18% rate. This is another scenario about which you may need to talk to us.