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TAX RATES - CAPITAL GAINS TAX

Prior to Gordon Brown's March 1998 budget, Capital Gains Tax(CGT) was a fiendishly completed, expensive to operate tax which raised only a few hundred million pounds for the Inland Revenue and only affected a small proportion of the population. Following changes in 1998 and 2000, it is still a fiendishly completed, expensive to operate tax which raises only a few hundred million pounds for the Inland Revenue and only affects a small proportion of the population.

The big change to CGT was the withdrawal of the indexation allowance to offset the impact of inflation as of 5/4/98 and the introduction of a taper relief instead. This is a lot more generous for business assets than for non-business assets.

A business asset is defined as: an asset used for the purposes of a trade carried on by you alone or in partnership or by a qualifying company owned by you; an asset held for the purposes of a qualifying full time office or employment; or a qualifying investment in shares. All shareholdings in unquoted trading companies and shareholdings by employees in quoted trading companies are counted as business assets. Shareholdings by outside investors are also business assets if the holding is a stake of 5% or more in the company.

The following table shows how the tax liability comes down over a ten-year period for non-business assets and over a four year period for business assets

Years asset held post 5/4/00 Business assets % of gain chargeable Non-business assets % of gain chargeable
0 100 100
1 87.5 100
2 75 100
3 50 95
4 25 90
5 0 85
6 0 80
7 0 75
8 0 70
9 0 65
10 0 60

The taper relief has the effect, after four years of bringing down the equivalent tax rate on business assets to 10% for higher rate taxpayers and 5.75% for basic rate taxpayers. On non-business assets the rates come down after ten years to 24% for higher rate taxpayers and 13.8% for basic rate taxpayers.

The taper relief works like this. Let's say you purchased an asset in 1990 for 40,000 and sold it for 100,000 in July 2000. You still qualify for relief under the indexation allowance for the period from 1990 to April 1998. This is calculated at 12,000. The holding period for taper relief is three years, 1998, 1999 and 2000.

The chargeable gain is worked out like this:

Proceeds - 100,000
Less Cost - (40,000)
60,000
Less Indexation (12,000)
48,000

Non-business asset
95% x 48,000 gives a chargeable gain of 45,600.

Business asset
50% x 48,000 gives a chargeable gain of 24.000.

For a higher rate taxpayer that would mean a tax bill of 18,240 on disposal of a non-business asset and of 9,600 on a business asset. Against this bill you could offset any relevant capital losses and your CGT personal allowance (7,200 for 2000/2001). You would only have had to hold your business asset for one more year to cut your capital gains tax bill even further and reached the maximum taper.

Had you decided to hold on to your asset until the year 2008 giving a holding period for taper relief of ten years, offering the maximum relief for investment assets (you would have reached maximum relief on business assets after four years), the sums would look like this. Let's assume your selling price is now 140,000 thanks to the longer holding period.

Proceeds 140,000
Less Cost (40,000)
100,000
Less Indexation (12,000)
88, 000

Non business asset
60% x 88,000 gives you a chargeable gain of 52,800.

Business asset
25% x 88,000 gives you a chargeable gain of 22,000.

For higher rate taxpayer that would mean a tax bill of 21,120 on disposal of a non-business asset and of 8,800 on a business asset.

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