‘One of the most chaotic areas of tax’

During his first emergency Budget speech, the Chancellor of the Exchequer, George Osborne MP, announced that higher-rate taxpayers would see the rate of capital gains tax (CGT) increase to 28 per cent from the previous 18 per cent, while the annual exemption of £10,100 would remain in place. He also said basic-rate taxpayers will continue to pay CGT at a rate of 18 per cent.

 

The rate of CGT will be held at 18 per cent if your combined taxable gains and income are below the upper limit of the basic rate of income tax, currently £37,400.

The Chancellor said the CGT regime was ‘one of the most chaotic areas of tax’ inherited from the Labour government and that he endeavoured to ‘balance the competing demands of fairness, simplicity and competitiveness’ in the reforms. He said the existing system had encouraged people to avoid paying tax by exploiting ‘the wider gap between the rate of capital gains tax and the top rates of income tax’.

He also announced that the 10 per cent CGT rate for entrepreneurs, which previously applied to the first £2m of qualifying gains made over a lifetime, would be extended to the first £5m of lifetime gains.

The Chancellor said that by leaving the rate at 18 per cent for low- and middle-income earners, he was excluding half the payers of CGT from the tax increase.

The annual exempt amount for CGT remains at £10,100 this year and will continue to rise with inflation in future years. He said the government had considered introducing tapers or indexation allowances instead of the flat rates, but had concluded that the complexity and administration involved would have been ‘self-defeating’.

Did you know?

Each taxpayer can realise an amount of capital gains each tax year free of CGT. This annual exemption is currently £10,100 (2010/11) of capital gains and therefore, when planning to sell a capital asset, consideration should be given to splitting ownership between husband and wife, or between civil partners, to benefit from two annual exemptions. The transfer of assets between spouses or civil partners is on a ‘no gain no loss’ basis, so this can provide an immediate saving of CGT. Similarly, you could consider spreading disposals over a number of years.

Thresholds, percentage rates and tax legislation may change in subsequent finance acts.