CGT top rate rises to 28%
JULY 6TH, 2010 By DAVID
We are still digesting the implications of the Budget announcement from a couple of weeks ago and one element of it which we’ve had quite a few calls about is the new 28% top rate of capital gains tax (CGT).
Previously CGT was a flat rate of 18% and was charged on any capital gains above the annual exempt amount (£10,100 for 2010/11) after deducting allowable expenses and losses. The main concern prior to the Budget was that the annual exempt amount would be reduced and CGT increased to 40% or 50%.
The announcement by the Chancellor that the annual exempt amount will remain at £10,100 (and continue to be indexed), and that basic rate taxpayers will continue to pay CGT at 18% seemed at first to be perfectly reasonable, as it implied that only higher and additional rate taxpayers would be subject to the new top rate of CGT.
However, on closer inspection it is clear that this is not strictly the case as you have to take into account an individual’s total taxable income and gains to establish the rate of CGT to apply against the net capital gain.
If an individual’s total taxable income and gains after all allowable deductions (including losses, the income tax personal allowance and the CGT annual exempt amount) are less than the upper limit of the basic rate income tax band (£37,400 for 2010/11), then the rate of CGT will be 18%. For gains (and any parts of gains) above that limit the rate will be 28%.
This means that basic rate taxpayers (who are close to the upper limit of the basic rate income tax band) will need to be careful when they make any future disposals, as they may subject the net gains to the top rate of CGT. Similarly it also means that landlords sitting on large buy-to-let capital gains face the prospect of paying 28% CGT on part or all of a gain when they make a future disposal.
All is not lost though, as the last time that income and capital gains were linked together for CGT purposes, it was possible to pay a single contribution into a pension and/or to make a charitable donation and thus increase the upper limit of the basic rate income tax band. The effect of which was to reduce the amount of a gain subject to tax at the higher rate and hence the CGT liability. We have not read anything in the small print of the Budget or in any technical journals so far to contradict this planning opportunity.
Please note that the chargeable gains of spouses/civil partners are taxed separately and transfers between spouses/civil partners do not give rise to a charge to tax. It is still possible to set registered losses against future gains.
Posted in: TAX Planning