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Immediate CGT increase catches investors on the hop
Good news for entrepreneurs in CGT balancing act

 

Immediate CGT increase catches investors on the hop

Investors were caught out in the Emergency Budget by an almost unprecedented mid-year increase in capital gains tax (CGT) rates.  From midnight 22 June 2010 measures brought in by the budget will increase the rate of CGT from 18% to 28% for individuals whose income and gains exceed the basic rate band (currently £37,400). Trustees will again feel the full effect of the increase and will be subject to the highest rate regardless of size.

HM Revenue & Customs (HMRC) has confirmed that individuals subject to the increased rate of CGT will be able to offset both losses and the annual exemption in the most beneficial way. However, the speed of implementation has provided little time for people to plan with full knowledge of the tax implications.

Whilst investors may not have appreciated the timing of the increase, the level of the increase was not as significant as some had feared. Having already announced that CGT rates would be increased from its current flat rate of 18% to a rate closer to income tax rates, it was widely anticipated that the Chancellor would announce a new top rate of CGT in the region of 40%. In addition there was good news for business owners with the increase in the lifetime rate for Entrepreneurs' Relief.

However, the questions and answers published by HMRC accompanying details of the rate increase states that the CGT rates for 2011/12 will be decided in the 2011 budget. This should act as a note of caution to those who believe that a further rate rise is unlikely.

Good news for entrepreneurs in CGT balancing act

Whilst there was an increase in the headline rate of capital gains tax (CGT) for middle and high earners , there was the welcome news for business owners, with the lifetime limit for Entrepreneurs' Relief being increased from £2 million to £5 million from midnight 22 June 2010.  

As a result, an individual who qualifies for the relief should only pay CGT at a rate of 10% on the first £5 million of qualifying gains. Taking into account the increase in the highest rate of CGT to 28%, the relief which started in April 2008 as a modest £80,000 tax saving is now potentially worth £900,000.

On the face of it this would appear to be good news for all entrepreneurs. However those who anticipated a much higher rise in the rate of CGT may have accelerated capital gains prior to 22 June to capture the previous CGT rates. No additional entrepreneurs' relief will be available against gains crystallised prior to 22 June in excess of the previous lifetime limit. In order to accumulate qualifying gains up to the new limit of £5 million, these entrepreneurs will need to crystallise further qualifying gains.