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Capital gains — looking at the new system

Last week’s article talked about the old Capital Gains Tax (CGT) system up to April 5, 2008. The new rules came in for assets sold or gifted on or after April 6, 2008.

As a recap, under the old rules:

  • Indexation Allowance reduced the gains if you owned the asset before April 1998.
  • Taper Relief covered the period from April 1998 and reduced the gains.
  • 2007/08 CGT exemption was £9,200.
  • Gains were taxed at 20% and 40% (and 10% for very low earners)

The new CGT system(from April 6, 2008)

If you dispose of an asset in 2008/09 or later (typically shares or property) then you need to tell the Revenue so they can send you a tax return in April 2009. Best to do this in writing. The gain needs to be declared on a return if one of the next two answers is Yes.

Will you make gains of more than £9,600 in 2008/09? Or will you sell or gift property (excluding your main residence) valued at more than four times this figure i.e. £38,400?

If you need to submit a 2008/09 tax return then you will be able to send in a paper one up to October 31, 2009. Filing online gives you longer — up to January 31, 2010. Whatever way you file, any CGT for 2008/09 will be payable on January 31, 2010.

Turning to the new rules, gone are Indexation Allowance, Taper Relief and different tax rates. Introduced are a flat CGT rate and an Entrepreneurs Relief for certain business disposals.

As with the old rules, the first relief you get when calculating capital gains is relief for your original costs. So if your rental property or holiday home cost £75,000 and you spent £25,000 putting in a new garage and conservatory, then you would get relief for the whole £100,000.

If you owned the asset before March 1982 then you need to obtain an estimate of its market value at March 31, 1982. For buildings a good tactic is to find an estate agent who was in business back then. Some do still exist. They may have files or recollections which allow an accurate value based on other deals done around 1982.

This March 31, 1982 value will be treated as your starting cost. Under the new rules this 1982 value is used even if, unusually, you paid more for the asset a few years prior to 1982.

If you spent money on capital improvements after March 1982 then these will also be deducted from the sales value in working out your gain.

The new Entrepreneurs’ Relief was introduced after the fuss over removing an effective 10% tax rate for business assets.

This relief applies to a much smaller set of disposals, however it does bring back an effective 10% rate for some people. The relief could be the subject of many articles, but in essence applies to gains of up to £1m.

It can be taken in stages — say £600,000 now, £100,000 next year and the unused balance of £300,000 in 2011/12.

The relief only applies to the sale of all or part of an existing business or to business assets where a business is sold or has ceased. For shares it applies to the sale of shares so long as you own at least 5% of the shares and you are employed by the company.

This Entrepreneurs’ Relief is therefore much more limited than the old regime. For example a farmer selling off a plot for a house would pay 10% tax in 2007/08. However, under these new rules he will not qualify. He could hardly be described as selling a part of his business if it is only one part of one of his many fields.

Leaving Entrepreneurs’ Relief aside then, the new CGT sums are relatively simple.

First get your net sale proceeds after agent and legal costs. Deduct your purchase costs and cost of improvements. This gives you the gain before your annual exemption.

The final allowance you get is your annual CGT exemption of £9,600 for 2008/09. Only if there are gains after you take this off will you have a tax bill.

The remaining taxable gains are taxed simply at a flat 18%. For 2008/09 this tax will be due on January 31, 2010.

Adrian Huston, a former tax inspector, is a director of Belfast tax and accountancy firm Huston & Co – or 028 9080 6080

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