Personal Tax

The 2008/09 rates and allowances for income tax, national insurance contributions, the Working and Child Tax Credits and Child Benefit/Guardian’s Allowance will be published after the September Retail Prices Index becomes available.

Capital Gains Tax Reform

For the tax year 2008/09 there will be a single rate of capital gains tax (CGT) set at 18%. The rate will apply to individuals, trustees and personal representatives. The 18% rate of CGT does not affect the income tax rates.

A number of changes to simplify the capital gains tax regime will be made, effective for disposals on or after 6 April 2008, including:

  • The withdrawal of taper relief (even if assets were held before 6 April 2008)
  • The withdrawal of indexation allowance (this change will only affect assets that were acquired before 6 April 1998)
  • The abolition of the ‘kink test’ (this means that all assets held on 31 March 1982 will be deemed to have had a cost equivalent to their market value on that date)
  • Simplification of the share identification rules. From 6 April 2008 all shares of the same class in the same company will be treated as forming a single asset (a ‘share pool’), regardless of when they were originally acquired. However, the same day rules and bed and breakfasting rules remain unchanged, and shares will be identified under those rules before they are identified with shares in the share pool.

The Annual Exempt Amount (AEA) will remain. The current level for 2007/08 is £9,200 for individuals and £4,600 for some trustees. The AEA for 2008/09 will be announced at Budget 2008. Other CGT reliefs, as explained below, continue to have effect.

These measures will have effect for disposals made on or after 6 April 2008 and for held over gains coming into charge on or after 6 April 2008. The current CGT rules continue to apply for disposals made up to 5 April 2008.

Examples

As a result of these changes, individuals disposing of assets on or after 6 April 2008 will work out the tax due as follows (please note that these examples use the 2007/08 AEA for illustrative purposes; the AEA for 2008/09 will be announced at Budget 2008):

In 1995 Andrew purchased a holiday home in Devon for £100,000. He sells it in July 2008 for £250,000. The CGT due is calculated by deducting the purchase cost of £100,000 from the sale proceeds of £250,000 to give a gain of £150,000. Assuming he has no other capital gains in the tax year 2008/09 he can deduct from this the full AEA of £9,200 giving a chargeable gain of £140,800. That gain is taxed at 18% giving tax payable on 31 January 2010 of £25,344.

In 1960 Sam purchased some shares costing £500. In March 1982 they were worth £450. In August 2008 she sells the shares for £25,000. To calculate her CGT liability Sam will need to deduct from the disposal proceeds of £25,000 the March 1982 valuation of £450, giving £24,550. (She cannot deduct the cost of the shares of £500 as abolition of the kink test means she has to use the March 1982 valuation.) Assuming she has the full AEA for 2008/09 available she then deducts the £9,200 giving a chargeable gain of £15,350. That gain is taxed at 18% giving tax payable of £2,763.

Other CGT reliefs will continue to be available. For example:

  • Private Residence Relief will continue to be available for principal private residences
  • Business asset roll-over relief continues to be available. Roll-over relief enables the CGT payable on the gain on a chargeable asset to be deferred until a point in the future. Taper relief is not given on the rolled-over gain under the current rules.
  • The Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCT) attract a number of CGT reliefs. These include: CGT exemption where income tax relief has been claimed; loss relief on unquoted shares; deferral relief; and extended taper relief (all subject to certain conditions). For disposals on or after 6 April 2008 there will be no taper relief available. All other CGT EIS and VCT reliefs continue to apply.
  • Business asset gift hold-over relief also continues to apply. This relief allows CGT on business assets that are given away to be held over until the assets are disposed of by the doner
  • Unused allowable losses from past years will continue to be allowed to be brought forward in order to reduce any gains.

Note: companies that are liable to corporation tax in respect of their chargeable gains are not affected by any of these changes.