In a welcome departure from Gordon Brown’s tendency to make life more complicated, Chancellor Alistair Darling simplified the capital gains tax (CGT) regime in last autumn’s Budget. The changes won’t affect your tax return this year (accounting for tax arising between 6 April 2007 and 5 April 2008). But they will make quite a difference to the amount of tax you’ll pay on any assets sold on, or after, 6 April this year.
The basics have not changed. Gains up to an individual exemption limit, currently £9,200, are still CGT-free. A tax liability is only triggered if you sell a “chargeable asset”, such as shares or buy-to-let properties, and losses can be offset against future CGT bills. Certain assets, such as your main home, gilts and assets that fall in value – ie, your car – remain exempt. And you can still deduct certain acquisition and disposal costs, such as legal fees, when working out the basic gain on disposal (sales proceeds minus cost). So what’s changed?
First off, CGT is now only charged at a single rate of 18%, rather than a marginal rate of 10%, 20% or 40% driven by the size of your income. Darling also scrapped the “indexation allowance” (based on changes in the retail price index) and “taper relief” systems. In a nutshell, the longer you owned an asset under the old rules, the less tax you paid. But not any more.
Finally, the special matching rules used to work out the profit on selling shares were simplified. Rather than having to follow a complicated system to work out the cost of any shares sold, now all shares bought before the disposal date are pooled to form a single “section 104” holding. So say you bought 4,000 Tesco shares in March 2005 for £5,000, then 6,000 more in September 2006 for £26,000. You then sell 4,000 in June 2008 for £20,000. The cost deducted from your sales proceeds is 4,000/10,000 x £31,000, or £12,400, to leave a gain of £7,600. Assuming that is your only gain, this year’s annual exemption of £9,200 will more than absorb it.