Capital Gains Tax – Rates & Entrepreneurs’ Relief
When the coalition government took office, it was announced they had agreed to bring the rate of CGT (Capital Gains Tax) for individuals (in respect of non-business assets) more in line with that of the higher rate of income tax.
From 23rd June 2010, there will be two main rates of CGT: 18% and 28% (replacing the single rate of 18% for all gains):-
The rate paid by individuals will depend upon the amount of their total taxable income. Gains qualifying for entrepreneurs’ relief will be taxed at a rate of 10% and the lifetime limit of gains qualifying for entrepreneurs’ relief will be raised to £5 million (from the previous figure of £2 million)
- Gains of trustees or personal representatives of deceased persons will be charged at 28% (except where they qualify for Entrepreneurs’ relief). It is worth noting that non-domiciled individuals who pay the remittance basis charge of £30,000 will also always pay CGT at 28% regardless of their income levels
The reason for the change is because it was felt the differential between the recently introduced 50 per cent highest marginal rate of income tax and the 18 per cent maximum rate of CGT was too great. Two rates of CGT now promote a fairness in the tax system.
It was widely thought the changes would be effective from 6th April 2011, but Ministers decided to bring in the changes immediately so as to provide certainty to investors.
How do I know whether a gain is chargeable at 18% or 28%?
Gains on disposals made before 23 June 2010 are chargeable at 18%. Where gains qualify for entrepreneurs’ relief, the amount of the gain is reduced by 4/9 and the net gain is taxed at 18%. This produces an effective tax rate of 10%
Gains on disposals made on or after 23 June 2010 are chargeable at 18%, if they fall within your basic rate band, or 28% for gains above that level, unless they qualify for entrepreneurs’ relief in which case, they are chargeable at 10%
Note: If you have a mix of pre and post 23 June 2010 disposals with CGT gains, the pre 23 June 2010 gains do not count as using up your available basic rate band.
Note: If you deferred a gain in 2009 by investing in EIS (Enterprise Investment Scheme) shares, the gain would have been chargeable at 18%, if the gain comes back into charge on or after 23 June 2010, it will be chargeable at 18% or 28% depending upon your income tax liability.
What if I have elected to pay tax on the remittance basis because I am not domiciled in the UK?
Gains arising (or treated as arising) before 23 June 2010 are chargeable at 18%. For gains arising on or after 23 June 2010, the rate will depend upon whether your income exceeds the amount of your basic rate band. If any rate band is not used, gains up to the unused amount are chargeable at 18% and all other gains are chargeable at 28%. If you pay the £30,000 “remittance basis charge”, you are deemed to have used up your full lower rate allowance and any gains will be taxed at 28%.
The Government continues to support entrepreneurs by increasing the lifetime limit for entrepreneurs’ relief to £5 million. This means, the first £5 million of gain will be taxed at 10%. The conditions for qualifying for entrepreneurs’ relief are complex and there are a number of conditions which must be met but, broadly, the following assets would qualify for the relief:-
- The whole or part of a business (as defined for this purposes) as a going concern
- Disposals of assets, or interests in assets, which were used for the purposes of the individual’s business that has now ceased, provided they were in use for those purposes at the time of the cessation
- Shares or securities of a company or of an interest in such shares and securities
- Assets used in a partnership or company if the disposal coincides with the individual’s withdrawal from the partnership or with the sale of their shares in the company
In most cases, the assets must have been held for at least one year and, in the case of shares, the individual must for the same period also own at least 5 percent of the ordinary share capital and have at least 5 percent of the voting rights and be an officer or employee (full or part-time) of the company, or one of the companies in the group.
For full details of current tax rates and limits go to HM Revenue & Customs website: http://www.hmrc.gov.uk/rates/it.htm