Budget: How the Capital Gains Tax changes will work
The government's plans to change Capital Gains Tax were probably the most controversial ahead of the Budget.
In the end, the changes announced by Chancellor George Osborne were not as dramatic as some commentators had anticipated.
Still - shareholders, entrepreneurs, buy-to-let investors, holders of share options and many others can both win or lose out under the new rules announced in the Budget.
Dermot Callinan, tax partner at accounting firm KPMG, outlines fine typical Capital Gains Tax (CGT) cases and explains how the Budget will affect them.
PROPERTY INVESTMENT - higher rate taxpayer
Graham is a higher rate taxpayer. He purchased an investment property which he hopes to sell at a gain of £95,000.
Had Graham sold the property on or before 22 June 2010 he would have paid CGT on the chargeable gain at 18% (i.e. £15,282). With effect from 23 June 2010 he will suffer CGT on this gain at an effective rate of 28% (i.e. £28,772). accordingly he will be worse off by £8,490.
PROPERTY INVESTMENT - basic rate taxpayer
David is an employee earning £25,000 a year, and is going to sell an investment property at a chargeable gain after his CGT annual exemption of £5,000.
As David's taxable income and chargeable gains are less than £37,400 he will be no worse off, because the 18% CGT rate remains unchanged for basic rate taxpayers.
ENTREPRENEURS RELIEF - for shares
Tom holds shares qualifying for Entrepreneurs Relief which he will be selling at a capital gain of £5m.
An increase in the lifetime allowance for Entrepreneurs Relief from £2m to £5m was introduced with effect from 23 June 2010. Accordingly if Tom was to sell his shares, the CGT payable would be £498,020 instead of £738,182. This represents a reduction of £240,162.
ENTREPRENEURS RELIEF - realising gains
Simon is a higher rate taxpayer and a serial entrepreneur who has already realised capital gains of £2m which qualified for Entrepreneurs Relief. He anticipates realising additional capital gains of £10m which will qualify for Entrepreneurs Relief prior to the end of the tax year.
With effect from 23 June 2010 the lifetime allowance for Entrepreneurs Relief has increased from £2m to £5m. The first £3m of capital gains realised by Simon will be subject to CGT at 10% but the remaining £7m will be taxed at 28% rather than 18%. Accordingly, despite the increase in Entrepreneurs Relief Simon will be £460,000 worse off on the anticipated disposal.
Jim, a higher rate tax payer, holds Save As You Earn (SAYE) share options. He is coming to the end of his five year savings contract. What are the implications for Jim if he exercises his options and sells his shares at a gain of £50,000?
- No income tax or NIC will arise on exercise.
- If it has not been used already, he can use his annual CGT exemption, currently £10,100, reducing the chargeable gain to £39,900 (£50,000 - £10,100).
- Assuming his share sale is in the current tax year but after 22 June 2010, he will pay CGT of £11,172 (£39,900 at 28%).
- Had Jim sold the shares in May 2010, he would have paid CGT of £7,182 (£39,900 at 18%). He is therefore worse off by £3,990.
Disclaimer: The tax changes summarised in this explainer may be amended significantly before enactment. The article is intended to provide a general guide to the subject matter and should not be regarded as a basis for ascertaining liability to tax or determining investment strategy in specific circumstances. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.