BN20 – Capital Gains Tax: rates and entrepreneurs’ relief
The rate of CGT remains at 18% for individuals with total taxable gains and income of less than the upper limit of the income tax basic rate band. Legislation will be included in Finance Bill 2010 to introduce a new rate of CGT of 28%. The 28% rate applies to gains (or any parts of gains) above that limit.
For trustees and personal representatives of deceased persons, the rate is increased to 28% on all gains (previously 18%).
The rate of CGT for gains qualifying for entrepreneurs’ relief remains 10%. The lifetime limit on gains qualifying for entrepreneurs’ relief is increased from £2 million to £5 million.
The annual exempt amount (AEA) for 2010/11 remains at £10,100.
Current law and proposed revisions – rates of CGT
At present section 4 of the Taxation of Chargeable Gains Act 1992 (TCGA) provides that net gains chargeable to CGT (after deduction of reliefs, losses and the CGT AEA) are taxed at 18%.
Finance Bill 2010 will include provisions to change the rates of CGT for gains arising on or after 23 June 2010.
For individuals, where their total taxable income and gains after all allowable deductions (including losses, the income tax personal allowance and the CGT AEA) are less than the upper limit of the basic rate income tax band (£37,400 for 2010/11), the rate of CGT will be 18%. For gains (and any parts of gains) above that limit the rate will be 28%.
For trustees and personal representatives of deceased persons, the rate will be 28%. Gains arising in 2010/11, but before 23 June 2010, will continue to be liable to CGT at 18% and will not be taken into account in determining the rate (or rates) at which gains of individuals arising on or after 23 June 2010 should be charged.
Certain CGT reliefs allow gains on disposal of an asset to be deferred until some time after the disposal. For instance, a gain can be reinvested in shares under the Enterprise Investment Scheme (EIS) and, subject to conditions, can be deferred until the EIS shares are disposed of. The CGT rate(s) on a gain deferred in this way will be the rate(s) at the time the deferral ends and the gain becomes liable to tax. Gains on disposals before 23 June 2010 which are deferred until 23 June 2010 or later will therefore be liable to CGT at 18% or 28%, in the same way as gains arising on disposals on or after that date.
In working out the CGT payable, tax payers will be able to deduct losses and the AEA in the way which minimises the tax due.
An example provided by HMRC illustrates how these changes might work in practice:
In 2010/11 X’s taxable income, after all allowable deductions and the personal allowance, is £27,400. The upper limit of the income tax basic rate band is £37,400. X sells an asset in May 2010 and realises a chargeable gain of £17,000. In November 2010 X sells another asset, realising a chargeable gain of £25,100. X has no allowable losses to set against these gains, and the AEA for 2010/11 is £10,100. Neither of the gains qualifies for entrepreneurs’ relief.
X’s taxable income is £10,000 less than the upper limit of the basic rate band (£37,400 - £27,400). X sets the AEA against the later gain (because part of that gain is liable to tax at the higher CGT rate), leaving £15,000 taxable (£25,100 - £10,100). The first £10,000 of the £15,000 is taxed at 18% and the remaining £5,000 is taxed at 28%. The £17,000 chargeable gain X realised in May 2010 before the change of rates on 23 June 2010 is taxable at the old 18% rate.
For trustees and personal representatives of deceased persons, the CGT rate will be 28% for gains arising on or after 23 June 2010, except where entrepreneurs’ relief applies.
Entrepreneurs’ relief – rate of CGT and lifetime limit on relief
Subject to satisfying certain conditions, including the lifetime limit of £2 million, gains on disposals of entrepreneurial businesses by individuals and certain trustees qualify for entrepreneurs’ relief (Chapter 3 of Part 5 of TCGA). Currently entrepreneurs’ relief reduces qualifying gains by 4/9 and the remaining 5/9 are then charged at the single 18% rate. This results in qualifying gains being taxed at an effective rate of 10%.
The changes to CGT rates from 23 June 2010 would mean the 4/9 reduction no longer achieved an effective rate of 10%. Finance Bill 2010 will therefore include provision to charge gains on disposals that qualify for entrepreneurs’ relief on or after 23 June 2010 at a 10% rate. The previous 4/9 reduction will cease to apply from that date.
The amount of an individual’s gains that can qualify for entrepreneurs’ relief is subject to a lifetime limit of £2 million (£1 million for disposals before 6 April 2010). For trustees, the £2 million limit is that of the beneficiary of the settlement who meets the conditions for the trustees to claim the relief.
Finance Bill 2010 will include provision to increase that limit to £5 million from 23 June 2010.
Where individuals or trustees make qualifying gains above the previous £2 million limit before 23 June 2010 (£1 million limit before 6 April 2010), no additional relief will be allowed for the excess above the old limit. But if they make further qualifying gains on or after 23 June 2010, they will be able to claim relief on up to a further £3 million of those additional gains (or up to £4 million where the earlier £1 million limit applied), giving relief on accumulated qualifying gains up to the new limit of £5 million. In determining at what rate(s) an individual should be charged to CGT on any other gains, those gains qualifying for entrepreneurs’ relief are set against any unused basic rate band before non-qualifying gains.
Life Insurance Deficiency Relief
Although no specific Budget Note was issued on this subject, the Government has confirmed that the deficiency rules will reduce tax due on income subject to higher rate and dividend upper rate tax only and not be extended to the additional rate and dividend additional rate as previously proposed. The associated anti-avoidance legislation, previously announced in March, will therefore not be required.