Capital Gains Tax
Latest Developments
After much consternation from the business community, the Treasury has changed its position on Capital Gains Tax (CGT) and introduced new measures to help small business. The Chancellor of the Exchequer, Alistair Darling has introduced a new tax relief for entrepreneurs. It is called 'Entrepreneurs Relief' and will deliver a 10 percent tax rate for up to the first £1 million of lifetime capital gains, while gains above £1 million will be charged at the usual 18 percent.
While the introduction of entrepreneurs' relief will help many small businesses, there are a number of wider implications for investors as the new rules on capital gains tax come into effect after 5 April 2008. It is imperative that people re-evaluate their financial position to ascertain the best course of action, especially as the chancellor has not finalised all the changes to CGT.
What does this mean for business owners?
Had the Treasury implemented a flat rate of 18 per cent, business owners would have had to pay an increased 80 percent in capital gains tax when they sold their businesses. With the new changes, business owners will pay 10 percent for up to the first million, as long as they have a stake of 5 percent or more in the company, and the business has been owned for two years.
Business owners will be able to make multiple claims for tax relief on gains as long as it does not exceed £1 million since this is a lifetime limit.
These new changes apply to anyone who own more than a 5 percent stake in a business whether they're an investor, company director or employee.
What do the changes mean for employee share ownership?
Employees in Save As You Earn (SAYE) schemes could face a significant tax rise after 5 April 2008. The CGT rules before 5 April 2008 stated that basic rate tax payers who have shares in their employer for at least 2 years were subject to a 5 percent CGT rate. However after 5 April, employee shareholders will have to pay an increase of 13 percent on any gain above £9,200.
What do the changes mean for investors?
After 5 April 2008 investors could find themselves paying a higher rate of tax. Therefore investors should re-evaluate their financial position, whether you have investments in the Alternative Investment Market (AIM), buy-to-let properties, or you own second homes; investors need to consider whether they should sell their assets now, or after 5 April 2008 when the new CGT rules come into effect.
What should you do?
Calculate your gains that you have made on your assets to determine which assets are going to be worse off or better, before and after the new tax year. Make use of your CGT annual exemptions if you are married or in a civil partnership. We also recommend that you explore investments that are exempt from capital gains tax or paid at a much lower rate; such as Enterprise Investment Schemes (EIS) or Venture Capital Trusts (VCT).