Author: Stephen Phillips, 10 December 2007.
In addition to ensuring that couples only pay inheritance tax on estates of more than £600,000, the Chancellor also took the opportunity of his first Pre Budget Report to alter the way Capital Gains Tax (CGT) applies. For some, this is good news......but for others, particularly business people, this will probably mean paying more tax; in extreme cases, more than three times as much. Removal of Taper Relief
Together with the introduction of a single Capital Gains Tax rate of 18%, the proposed removal of taper relief, which currently means that the longer you own an asset before selling it, the less CGT you pay, will result in everyone paying the same rate of tax on the sale of any assets other than their main home.
It is important to be aware that the first £9,200 of gains each year is exempt; this figure tends to rise, modestly, each year. So if you bought some shares in 1990 for £2,000 and now sell them for £10,000 then, provided you have no other realised gains during the year, there is no tax to pay.
More Tax to Pay
The problem is that by unifying the CGT rate, matters may be simplified, but many people will actually end up paying more tax than previously. Those affected are largely anyone selling business assets – such as the shares in a family business, or in a company you actually work for – with the exception of higher rate taxpayers who have held the shares for less than two years. But even basic rate taxpayers who have held non-business assets for more than five years will end up paying more tax, from next April.
In an extreme case, a basic rate taxpaying employee who sells shares in the company he works for after just a few years could end up paying 18% in tax, rather than the current 5%.
Selling Business Assets
Due to a concerted campaign by the four leading business organisations in the UK, the Chancellor has indicated that he will consider re-introducing the retirement relief that was removed towards the end of the 1990s by his predecessor (and current boss) Gordon Brown. This is likely to increase the personal exemption from £9,200 to £100,000 for those selling business assets at point of retirement.
So for a higher rate taxpayer who has built up a business from scratch over 30 or 40 years and is now selling it for perhaps £1,000,000, they will, thanks to the Chancellor, face a tax bill of £162,000 from next April, whereas the same sale this year would have attracted a tax bill of just over £96,000. For someone who had managed to become a basic rate taxpayer at the time the gain was realised, the tax bill would have been just £48,000; less than a third of the new amount.
It is unlikely that the Chancellor’s largesse will extend to those realising gains under share-based profit schemes.
Profits into Pension Contributions
For business owners and employees alike, the impetus to convert profits into
pension contributions has never seemed more pressing.
Of course, it is important always to seek independent financial advice before making
any decision regarding your finances. For advice and assistance, please speak to one of our financial advisers or complete the
enquiry form.
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