Capital Taxes

Capital gains tax (CGT) annual exemption

The annual exemption for 2007/08 is £9,200. For most trusts the exempt limit is increased to £4,600.

CGT rates of tax

For individuals capital gains continue to be treated as the top slice of income. For 2007/08 rates continue to be aligned with those applying to savings income. Tapered gains are charged at 10% where gains plus taxable income do not exceed £2,230; 20% between £2,231 and £34,600; and 40% on any balance.

For trustees the rate of CGT is 40%.

Inheritance tax (IHT) threshold

The IHT nil rate band is increased to £300,000 with effect from 6 April 2007. The Chancellor previously announced that the band will rise to £312,000 in 2008 and £325,000 in 2009.

Planning Gain Supplement (PGS)

The PGS has been the subject of consultation since 2004 and is now expected to be introduced where planning permission is granted after 31 March 2009. The following principles have been established:

• the PGS will be levied at a flat rate on the difference in the value of land without planning permission and the freehold value with full planning permission

• both residential and commercial developments will be included

• there is unlikely to be any exemption for small scale developments such as building a single house in a back garden

• the developer will pay the PGS within 60 days of the date the development commences

• the developer will have to self assess the PGS and obtain the necessary valuations.

Capital loss anti-avoidance measure

In 2006 specific rules were introduced to target 'contrived' capital losses created by companies. A loss accruing to a company is not an allowable loss if it arises as part of arrangements which have a tax advantage as their main purpose or one of the main purposes.

HMRC have become concerned that persons other than companies were involved in the creation of 'contrived' capital losses to secure a tax advantage. Therefore for capital losses arising on disposals on or after 6 December 2006 the anti-avoidance rule for companies is extended to all persons liable to CGT including individuals, trustees and personal representatives.

A capital loss will still be available if it arises from 'genuine commercial transactions'.

Homes abroad owned through a company

Individuals often purchase a property abroad by setting up a company to own the property. This is done for a variety of reasons related to the tax or inheritance laws of the country in which the asset is situated. Where the individuals direct the company's affairs (whether through an agent or not) they could be assessed on an employment income benefit in kind charge as a director of the company. Legislation will remove that tax charge where certain qualifying conditions are satisfied:

• the company is owned by individuals

• the sole activity of the company is holding the property for occupation and/or letting

• the property is the company's only or main asset

• the property is not funded directly or indirectly by a connected company.

The legislation will not be enacted until 2008 but HMRC will not seek to tax anyone in the intervening period provided the qualifying conditions are satisfied.

Pre-owned assets: late elections

Where an individual benefits from assets that are subject to the pre-owned assets income tax charge, they can elect for those assets to be treated as forming part of their estate for IHT purposes. For individuals who are liable from 2005/06 (the first year of charge), the deadline was 31 January 2007. The Finance Bill will include legislation to allow HMRC to accept late elections. This may apply to any late elections for the 2005/06 tax year.

Stamp Duty Land Tax (SDLT): exchanges of property

If individuals exchange property SDLT is charged by reference to the market value of the property acquired by each party. However if the parties are 'connected persons', for example husband and wife or brother and sister, the market values are aggregated and the rate of SDLT is that applicable to the aggregate value. This may mean that a higher rate of tax applies.

The Finance Bill will provide that the two legs of an exchange will not be linked and will apply to exchanges on or after the date of Royal Assent.

SDLT: new zero carbon homes

A new relief will be introduced for buyers of new zero carbon homes from 1 October 2007. Relief will not be available on existing homes. The relief will be:

• purchase price of £500,000 or less - no SDLT

• purchase price above £500,000 - SDLT liability reduced by £15,000.

A property will qualify if there are zero carbon emissions from all energy use in the home over a year. To achieve this, the fabric of the home will be required to reach a very high energy efficient standard and to be able to provide onsite renewable heat and power.

The relief will not be available beyond 30 September 2012.