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23rd June 2010

Capital Gains Tax reform fits with Chancellor’s “tough but fair” policy

Head of tax strategy at ktsowensthomas, Stephen Williams

As widely predicted, the Chancellor has announced increases to the rate of capital gains tax (CGT), although the increase is not as severe as many had led to believe. This is generally welcome news to those taxpayers that are affected by CGT.   The changes are likely to affect those taxpayers who hold property, such as buy-to-let and second houses, shares in companies, fine art and antiques.

From 23 June 2010 there will be two main rates of CGT, 18 per cent and 28 per cent, in place of the single rate of 18 per cent for all gains.  Low and middle income savers who pay income tax at the basic rate make up over half of all capital gains taxpayers. They will continue to pay tax on their capital gains at the current rate of 18 per cent. Taxpayers on higher rates will pay 28 per cent on their capital gains.

Those taxpayers that are sitting on substantial assets such as property investments or share portfolios are certainly going to notice the increased rate of CGT, but they may take some comfort that the rates did not increase to 40% as widely speculated. This is a balanced move from the Chancellor who does not want to see CGT revenues fall by putting up the rate too significantly. This increase is unlikely to lead to a “locking in” effect whereby taxpayers simply do not sell assets because of the tax, it’s unlikely to lead to an increase in tax evasion or avoidance, and there should not be a decrease in long-run economic growth because of less saving.

Each tax year nearly everyone who is liable to capital gains tax gets an annual tax-free allowance which is known as the ‘Annual Exempt Amount’.  A taxpayer only pays capital gains tax if the overall gains for the tax year are above this amount. Many commentators had predicted that the current Annual Exempt Amount of £10,100 would either be abolished or significantly reduced. However, this was not the case and the relief continues to be available but will instead remain static.

From 23 June 2010, gains qualifying for entrepreneurs' relief will be taxed at a rate of 10 per cent, and the lifetime limit of gains qualifying for entrepreneurs' relief will be raised to £5 million (from the previous figure of £2 million). This is what the Chancellor was referring to before the Budget when announcing that there would be “generous exemptions for entrepreneurial activities”. Hopefully, these measures will indeed show that the “UK is Open for Business” and will encourage entrepreneurs to invest in the British economy.

The Chancellor predicted that the CGT changes should bring in almost £1billion in extra revenues.  There has been significant speculation regarding reform of the CGT regime including the re-introduction of the Indexation Allowance and CGT Taper Relief. The Chancellor made it clear that this was not the case, as the re-introduction of these reliefs would be overly complex and difficult to administer. This may be disappointing to those entrepreneurs sitting on significant capital gains in excess of the £5 million threshold, but fits in with the Chancellor’s “tough but fair” policy with the better-off paying more.

Personal Tax and National Insurance – the changes explained
Head of tax strategy at ktsowensthomas, Stephen Williams

The Chancellor announced that from 6 April 2011 the income tax personal allowance for those aged under 65 will be increased by £1,000 to £7,475.  This is the amount that people will be able to earn before they have to start paying income tax. In economic terms the Chancellor advised that “"Twenty-three million people who are basic rate taxpayers will each gain by up to £170 a year.  880,000 of the lowest income taxpayers will be taken out of tax altogether." Income tax rates in the UK are currently 20 (basic rate), 40 (higher rate) and 50 (additional rate) per cent, depending on a person's income.

The basic rate tax limit will, however, be reduced so that higher rate taxpayers do not benefit from the increased personal allowance. The exact figure will be confirmed when September’s Retail Prices Index (RPI) is known.

For National Insurance, the secondary (employer) threshold will rise by £21 a week above the level that indexation would reach. The secondary threshold for the 2011-12 tax year will not be known until publication of the RPI for September. The secondary threshold change is in addition to the increase in the primary (employee) threshold already planned for 2011-12, and the 1 per cent rise in rates.

The measures announced by the Chancellor are aimed at reducing the tax liability for those on lower incomes and have no impact on most higher rate taxpayers who are employees (or self-employed) and this will help employers. This may take some pressure off employers to increase wages for those lower paid employees to in order to compensate for the other announced budget changes (such as the restriction of the Child Tax Credits and freezing of child benefit).

The Chancellor also announced that anyone who sets up a new business outside London, the south-east and east of England will be exempt from £5,000 of National Insurance contributions for each of first 10 employees they hire. Although this is a welcome incentive for entrepreneurs to establish their business in Wales, it remains to be seen whether this goes far enough to promote the growth of the Welsh private sector economy.


ktsowensthomas is a firm of accountants, tax and business advisors with a head office in Cardiff Bay and a regional office in Aberdare covering Rhondda Cynon Taf, Heads of the Valleys and Mid Wales. For more information contact Kate Moore on 029 2082 9000 or visit www.ktsowensthomas.com

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