Capital
Taxes
Capital
Gains Tax - Taper Relief
A
fundamental reform of the capital gains tax (CGT) system was
made in 1998 for individuals, trustees and personal representatives.
A number of further changes have been made since.
A capital gain arises when certain capital (or 'chargeable')
assets are sold at a profit. The gain is the sale proceeds
(net of selling costs) less the purchase price (including
acquisition costs). From this a deduction is made to reduce
the gain to an amount which is taxable.
Please note taper relief does not affect company assets.
How
Taper Relief Works
The
pre-1998 system involved the deduction of an indexation allowance
based on the increase in the retail prices index over the
period of ownership of the asset. It was designed to remove
the inflationary element of any gain.
This system was replaced with taper relief which is based
on the length of ownership and reduces the gain by a percentage.
The percentage depends on the period of ownership of the asset
and the type of asset - the percentage relief is higher for
business assets (see definition below).
Where assets are sold after 5 April 1998 but were originally
purchased before that date the calculation has to accommodate
both sets of rules. Indexation is calculated up to April 1998.
This is deducted from the gain before taper relief is deducted.
Amount
of taper – non-business assets
Taper
relief is given by reference to the number of complete years
of ownership after 5 April 1998. In addition a bonus year
is added where the asset was acquired before 17 March 1998
(Budget Day).
The taper relief table is as follows.
| Number
of complete years asset held after 5.4.98 (including 'bonus'
where relevant) |
Non-business
taper
% |
1
2
3
4
5
6
7
8
9
10 or more |
0
0
5
10
15
20
25
30
35
40 |
Example
Bruce sold some shares in Glaxo plc for £19,000
in August 2004. They were acquired in 1984 for £5,000.
|
£ |
| Sale
Proceeds |
19,000 |
| Less:
Cost |
(5,000) |
| |
14,000 |
Less:
Indexation (say)
(to April 1998) |
(4,000)
|
|
10,000 |
| Less:
Taper relief |
(2,500) |
| x
(6 years + bonus year 25%) |
______ |
| Chargeable
Gain |
£7,500
|
|
Amount of taper – business assets
For disposals of business assets after 6 April 2002 there
is a different table (disposals prior to 2002 had yet another
different table).
Number
of complete years
asset held after 5.4.98
|
Business
taper % |
1
2 or more |
50
75 |
Example
Bruce sold his 30% shareholding in Gordon Ltd for £190,000
in August 2004. It was acquired in 1984 for £50,000.
|
£ |
| Sale
Proceeds |
190,000 |
| Less:
Cost |
(50,000) |
|
140,000 |
Less:
Indexation (say)
(to April 1998) |
(40,000)
|
|
100,000 |
| Less:
Taper relief |
(75,000) |
|
(2 years + fi 75%) |
______ |
| Chargeable
Gain |
£25,000
|
|
The
CGT regime is therefore very attractive provided that the
asset has been a business asset throughout the period of ownership
(or since April 1998 if acquired earlier than April 1998).
Definition
of Business Asset
The
following assets are currently eligible for business asset
taper relief:
- one
used for the purposes of an individual's (or partnership's)
trade
- an
asset owned by an individual but used in the individual's
qualifying trading company
- property
let to any trade
- all
shareholdings in unquoted trading companies (whether or
not the shareholder works in the business)
- all
shareholdings held by full-time or part-time employees in
quoted trading companies
- shareholdings
in quoted trading companies where the shareholder is not
an employee but can exercise at least 5% of the voting rights
- shareholdings
held by full-time or part-time employees in non-trading
companies provided they and their associates do not own
more than 10% of the company.
The
definition of a business asset has changed several times since
the introduction of taper relief.
Change in the assets status
In some circumstances an asset will not wholly qualify for
full business asset taper relief. This may be due to a change
in the definition of business assets or because the asset
has not always been used for a qualifying purpose. In these
circumstances part of the gain will qualify for business asset
taper and part for non business taper relief. Please contact
us for further information on this point.
Matching
Rules for Shares
There
have always been special rules to decide which shares have
been sold where there is a part disposal of a shareholding
in a particular company. In the taper relief system, share
sales are matched with the most recent acquisition. This results
in the lowest amount of taper being given.
Assuming the shares in question are a non-business asset,
no taper will be given on a shareholding which was acquired
within three years of the sale. If however a sale is made
in 2004/05 of non-business asset shares acquired before 5
April 1998, 25% taper will be given.
Use of annual exemption
The annual exemption for 2004/05 is £8,200. The opportunity
to make tax free gains up to this level should not be overlooked.
The sale and almost immediate repurchase of the same shares
by the same person cannot however be used to generate a gain.
There are ways around this.
- Sell
shares from your personal portfolio and repurchase through
an ISA.
- A
sale by one spouse followed by the repurchase in the name
of the other spouse.
- Wait
30 days before repurchase (but be aware of financial risk
due to share price movements).
Losses
Capital losses must be set against gains before taper relief
is calculated. In effect, the loss is tapered.
Where there are several gains made in the year the losses
can be set against the gains in the order that produces the
lowest tax charge. In effect losses should first be set against
gains with the lowest taper relief.
Example
Rosemary makes the following gains in 2004/05:
| |
£ |
Taper
relief % |
| Asset
1 |
2,000
|
nil |
| Asset
2 |
15,000
|
75% |
| Asset
3 |
4,000
|
20% |
She also realises a capital loss of £3,000
|
|
£ |
£ |
| Asset
1: Gain |
2,000
|
|
| Less:
Loss |
(2,000) |
|
|
|
nil |
Asset
3: Gain
|
4,000 |
|
|
Less: Loss |
(1,000) |
|
|
3,000 |
|
| Less:
Taper relief (20%) |
(600) |
|
|
|
2,400 |
| Asset
2: Gain |
15,000 |
|
|
Less: Taper relief (75%) |
(11,250) |
|
|
|
3,750 |
|
Where
losses are brought forward from earlier years, they only have
to be used to the extent that the gains in the year are not
covered by the annual exemption.
Deferring
Gains Through EIS Investments
The
Enterprise Investment Scheme (EIS) allows individuals to defer
capital gains made on the disposal of any asset so long as
the gain is reinvested in shares in a qualifying unquoted
trading company (EIS). The ability to defer gains against
investments in Venture Capital Trusts was removed from 6 April
2004.
The deferred gain crystallises on a subsequent disposal of
the shares unless certain conditions are breached before that
time.
Please note:
- certain
trades (eg property development and farming) are excluded
- the
shares must be acquired by subscription - ie only new shares
qualify
- the
EIS scheme is complex and advice is essential.
How
We Can Help
The
taper relief provisions can dramatically affect the amount
of CGT payable.
If you are contemplating the sale of your business interests
soon please talk to us. We would be happy to discuss the options
with you.
Please also contact us if you are interested in deferring
CGT liabilities using the EIS scheme.
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For information of users: This material is published
for the information of clients. It provides only an overview
of the regulations in force at the date of publication, and
no action should be taken without consulting the detailed
legislation or seeking professional advice. Therefore no responsibility
for loss occasioned by any person acting or refraining from
action as a result of the material can be accepted by the
authors or the firm.
|
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