Introduction to
Capital Gains Tax

Get to grips with the new CGT rules

IN HIS recent Budget the new Chancellor of the Exchequer, George Osborne, announced some important changes to capital gains tax.

The new rules apply to all disposals which take place after June 22nd 2010.

For most property and share investors capital gains tax will become more costly and a bit more complicated.

The flat 18% tax rate, which used to apply to everyone, has been scrapped and replaced with two tax rates:

• 18% for basic-rate taxpayers
• 28% for higher-rate taxpayers

From now on, how much capital gains tax you pay will depend on the size of your gain and how much other income you have earned during the tax year.

There is no indexation relief or taper relief to protect long-term investors from the ravages of inflation. This means the new 28% tax rate is potentially higher than it was under even the old pre-2008 tax regime.

Under those rules capital gains were taxed at up to 40% but, thanks to taper relief, the effective tax rate for long-term investors, who held onto assets for more than 10 years, would have been just 24%.

There was some good news in the Budget, however. Although widely anticipated, the annual CGT exemption, which protects the first £10,100 of capital gains from tax, was not reduced. In fact, the new Chancellor promised that it will continue to rise with inflation.

Other Capital Gains Tax Reliefs
At a time when so many tax reliefs are under threat it is important to mention what was not changed in the Budget.

There appears to be some good news on the capital gains tax front because there seem to be no plans to alter any of the other CGT reliefs, some of which are extremely valuable, including:

• Principal private residence (PPR) relief
• Private letting relief
• Holdover relief
• Rollover relief

Before the Budget there were fears that one of the most valuable PPR rules, that allows you to elect to treat a second home as your tax-free main residence, would be scrapped.

This tax break came under the media microscope recently when it was found to have been used by a number of MPs to avoid paying CGT on properties that had been paid for by taxpayers.

Although very few of us have any sympathy for MPs and their tax bills, it’s good news for all the other second home owners out there that this tax saving strategy still works!

Worse to Come?
Many people breathed a sigh of relief when they discovered that the new CGT rate was just 28% and not 40% or even more.

However, buried deep in the Budget publications was a comment that the Chancellor “will decide the rates of CGT for 2011/12 in the Budget in 2011”.

In other words, we cannot rule out a further increase!