From 6 April 2008 substantial changes to Capital Gains Tax (CGT) will apply to individuals, trustees and personal representatives, but not for companies.

Finance Act 2008 will introduce the following changes:

• A main rate of CGT of 18% will apply to all gains other than those covered by the new entrepreneurs tax relief or the CGT annual exemption.
  
  
• A lower rate of 10%* for gains on certain business assets which are covered by the new entrepreneur’s relief (see below).
  
  
• Capital gains will not longer be taxed by reference to income tax rates and bands
  
  
• The following will be abolished: taper relief, indexation allowance (currently frozen at April 1998), and'halving relief', however, in some cases, indexation will not be lost after 6 April 2008
  
  
• Rebasing of cost to 31 March 1982 value will be compulsory for assets held at that date
  
  
• Simplification of the rules for matching certain assets (mostly shares) disposed of with assets acquired
  
  
• The new Entrepreneur’s relief will be available in respect of gains made on the disposal of certain business assets.
  

  * not exactly, slightly higher rates apply if the CGT annual exemption is unused.

Entrepreneurs' relief
Although not dissimilar to CGT retirement relief which was phased out in 2002/03, this relief will not be based on any age or illness conditions and the qualifying holding period will only be one year.

• The first £1 million of lifetime gains on qualifying business assets will be charged to CGT at an effective rate of 10-ish per cent. Gains in excess of £1 million will be charged at the normal 18 per cent rate.
  
  
• An individual will be able to make claims for relief on more than one occasion, up to a lifetime total of £1 million of gains qualifying for this type of relief.

According to HMRC’s guidance notes the new relief will apply against:

• Capital gains made when an individual disposals of all or part of an unincorporated business or partnership
  
  
• Capital gains made when an individual disposes of assets following the cessation of a business,
  
  
• Capital gains made by individuals on the disposals of shares and securities in a trading company (or the holding company of a trading group) provided that the individual making the disposal:
  
  
  
  1. Has been an officer or employee of the company or one in the same group and,
     
     
  2. Owns at least 5% of the ordinary share capital of the company, and is entitled to exercise at least 5% of the voting rights.
     

A 'business', in terms of this relief will be any trade, profession or vocation, excluding property letting business, but furnished holiday letting is treated as a trade for this relief.

Other existing CGT reliefs
Other existing reliefs will continue to be available post 6 April 2008 for:

• Principal private residence relief and letting relief
  
• Business asset roll over relief
  
• CGT relief under the VCT and EIS schemes
  
• Business asset gift hold-over relief
  
• Losses may still be carried forward

Non-business asset, mixed use asset disposals
Following introduction of the new regime there will not be 'tainted' or mixed taper relief problems nevertheless, some exclusive business use may still be detrimental in some cases, where it might deny other reliefs, such as the principal private residence relief.

Business disposals

Even though business asset taper relief disappears from 6 April 2008, Entrepreneur’s relief is dependent on there being a qualifying business ongoing. It will therefore be essential to ensure that the business is a qualifying trade, profession or vocation (or holiday let), which mean the former 20% test lives on post 6 April 2008. This test measures non-trading activities, which must not be substantial (i.e. account for more than 20% of turnover, or assets or profits). This means that businesses will have to continue to watch the size of cash balances or investment activities after all.

Deferred gains
Where a gain has been deferred say, under Enterprise Investment Scheme (EIS), indexation accrued up to 5 April 2008 will not be lost when the gain becomes chargeable after that date. Taper will not apply to deferred gains from 6 April 2008.

The position for some deferred gains which would have formerly attracted halving relief and from 6 April 2008 require some further verification from HMRC.

Share pools
All share pools for shares held in the same company will be merged into a single pool - the s104 pool. Shares held at 31 March 1982 will be included at their 31 March 1982 valuation and shares purchased subsequently at their qualifying cost. The only shares which will not lose their indexation under this arrangement are those which have been transferred between spouses on a no gain no loss basis, before 6 April 2008.

Special rules will remain for matching acquisitions and disposals made within 30 days of each other.

Source: Nichola Ross, Accounting Web (Sections edited by Power Accountax)