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George Osborne’s new Capital Gains Tax rules

By Adrian Huston

You could have been forgiven for thinking that the CGT changes announced on 22 June 2010 would not affect you since you don’t pay 40% tax. You might be wrong...

This Emergency Budget was I think an excellent example of managing expectations. The politicians had prepared the country for a very ‘tough but fair’ Budget. We were all expecting a rise to CGT and the fear was it would go back to a 40% rate.

More details on the Budget are available in my video here .

When the Chancellor announced his Budget loads of people across the UK breathed a sigh of relief. A modest rise to VAT and no income tax rises. Even the CGT rate only went up to a maximum of 28%.

The detail of the new CGT rules needs some examining so you don’t get caught out.

The CGT regime changed at midnight on Budget Day 22 June 2010. So any deals done now come under the new rules. What are they?

1. The annual exemption remains at £10,100. Gains of less – no tax due.

2. New CGT rate for higher-rate taxpayers 28%

3. CGT rate for basic-rate taxpayers 18% or more.

4. No Taper Relief or Indexation Allowance to reduce gains.

5. Date to pay CGT for 2010/11 - 31 January 2012.

The most significant message I want to get out relates to people who pay basic rate 20% income tax. Just listening to the Budget they might think the old 18% CGT rate applies to them. As the 80’s Bronski Beat song goes “It ain’t necessarily so.”

These basic rate taxpayers need to add together their income and their gains. If the total exceeds the basic rate threshold (£43,875) then some of the gains will face 28% CGT.

Example –

  • Jenny’s income as a civil servant is (now frozen for two years at) £33,875 pa.
  • She sells her holiday home in July 2010 for £30,100 more than she paid for it. Her gain is £30,100.
  • Deducting her annual exemption of £10,100 leaves Jenny having to pay CGT on £20,000.
  • She will pay CGT at 18% and also 28%.
  • Combining the taxable gains £20,000 and the income £33,875 gives a result of £53,875.
  • This is £10,000 over the basic rate tax limit.
  • So Jenny pays tax on £10,000 at 18% plus £10,000 at 28%.
  • Total tax bill is £4,600.

Some good news in the budget for those selling a business. Entrepreneurs’ Relief has the effect of taxing such gains at just 10%. There is a lifetime maximum of the amount of gains that can benefit from this saving – including in a number of different sales. The limit was £2 million but it has been raised to £5 million. You might think very few people could benefit from this, but those who sell a business (for instance a working farm) and then invest in another business and sell it could be very glad of this lifetime limit. And ,if you meet the conditions, who wouldn’t want to pay CGT at 10%?

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

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