New Rules for Capital Gains Tax

New Rules for Capital Gains Tax
From the moment Labour lost out to the new coalition Government we waited with baited breath for the emergency Budget announcement and the affect on Capital Gains Tax...

We were all expecting it, of course. Part of the price of the LibDems’ participation in the coalition was to implement their plan to increase the rate of Capital Gains Tax (CGT) from 18%. They wanted the new rate to be close to the rates of income tax, so we should be grateful that the Tories were able to moderate this to some extent, reducing what could have been 40% or even 50% to a top rate of 28%.

The change took effect from midnight on Budget Day (22 June). Gains before that date are taxed at the old rate of 18%.

For gains after 22 June, the rate of CGT depends on your other income and gains for the tax year. If you pay income tax at the basic rate of 20%, then the rate of CGT is 18% on gains up to the threshold for the 40% rate of income tax (taxable income of £37,400 after allowances). If the gain, added to your taxable income, takes you above the £37,400 threshold, then the rest of the gain is taxed at 28%.

It is important to note that gains made before 23 June are not included in the above calculation, so if your taxable income for 2010/11 is £30,000 and you make two capital gains of £20,000 each, one before 23 June and one after, the calculation works like this:


The gain before 23 June is taxed at 18%. You could if you wished reduce this gain by setting your Annual Exempt Amount (unchanged at £10,100) against it, but that would be a bad move as you can choose which gain to set it against and you will do better to set it against the later gain.

The second gain is added to your income to see how much falls below the threshold for the 40% rate of income tax. Using your Annual Exempt Amount reduces the gain to £9,900, so when added to your income of £30,000, we see that £7,400 falls into the basic rate band and is taxed at 18%, and only £2,500 is taxable at 28%
Your total Capital Gains Tax bill for the year will be £5,632. If you had made both gains last year, or this year but before 23 June, the tax would have been £5,382.

Of course, on larger gains and for higher rate taxpayers, the difference is more dramatic – on gains of £100,000 (all after 22 June), the difference will be £8,990 (£100,000 minus £10,100, multiplied by 28% instead of 18%).

Entrepreneur’s Relief (ER)

ER reduces the rate of CGT on certain business assets to 10% regardless of what your other income or gains are, and the good news is that the lifetime limit of £2million has been increased to £5million for gains after 22 June. If you made a gain qualifying for ER of £3million before 23 June, and another gain (also eligible for ER) of £3million after 22 June, only £2million of the first gain will qualify for ER and the other £1million will be taxed at 18%. All of the second gain will qualify for ER and will be taxable at 10%. In this case, you would elect to set your £10,100 Annual Exempt Amount against the first gain.

Practical Tip

Trusts and Deceased Person’s Estates

Unless they qualify for ER, these will pay Capital Gains Tax at 28% on gains after 22 June, regardless of their other income for the year, so if you are involved in administering the estate of a deceased person, and there are assets that (unusually) may realise a capital gain on disposal, you should take professional advice on the best way to minimise the CGT payable.

By James Bailey