QUESTION: The Budget in March announced the reduction in the rate of tax payable on capital gains. What are these new rules and rates and do they apply to all assets?
ANSWER: Capital Gains Tax (CGT) is a tax on the profit when you sell or dispose of an asset that has increased in value. It is the gain you make that is taxed, not the amount of money you receive. Disposing of an asset includes selling it, giving it away as a gift, or transferring it to someone else, swapping it for something else or getting compensation for it - like an insurance payout if it’s been lost or destroyed.
The higher rate of tax has been slashed from 28 per cent to 20, while the basic rate will fall from 18 per cent to 10, with the changes coming into effect from last month. However, the changes do not affect chargeable gains accruing on the disposal of residential property (that do not qualify for private residence relief), and carried interest.
The Treasury state the purpose of the rate cut is to create a strong enterprise and investment culture. The government’s intention is that cutting the rates of CGT for most assets is intended to support companies to access the capital they need to expand and create jobs. Retaining the 28 per cent and 18 per cent rates for residential property is intended to provide an incentive for individuals to invest in companies over property.
It is the latest measure to make life more accommodating for investors, following the introduction of a £5,000 in tax-free dividends and the increase in the personal allowance to £11,000 from April 6 past.
As CGT is a tax on the profit made when an individual sells or disposes of an asset that has increased in value, so a reduction means that investors will be able to keep more of the money they make outside of a tax-free wrapper, such as an Isa. The Treasury said the reduction in CGT was 'to ensure that companies have the opportunity to access the capital they need to grow and create jobs', and to make sure the next generation enjoy a 'strong investment culture'.
However, property investors and landlords will not see any benefit from the change as sales of residential property and carried interest (the share of profits or gains paid to asset managers) will be subjected to an eight percentage point surcharge - taking them back to the pre April rate.
On top of the CGT cut, entrepreneurs' relief is extended to long-term investors in unlisted companies. From Budget day, anyone buying newly-issued shares in an unlisted company will see their CGT capped at 10 per cent up to an allowance of £10million, provided they are kept for at least three years.
It is worth noting that from April, taxpayers will potentially have a personal allowance of £11,000, a dividend allowance of £5,000, a savings tax allowance generally of up to £1,000 (but which can rise as high as £6,000 for some individuals) and an annual capital gains tax allowance which is currently £11,100. That's a sum total of tax free allowances that could amount to £33,100. Fundamentally there will exist some form of tax- free allowance for most forms of investment return, whether dividends, interest or capital growth.
The increase in the distance between income tax rates and CGT rates will make drawing on capital each year as a form of income even more attractive than it currently is. This reinforces the need for individuals to build up portfolios which can provide gains to draw down on tax efficiently in the future.
Alongside the changes to the taxation of dividends and the normal annual capital gains allowance, the reduction in CGT rates makes directly held stocks and share investments very attractive indeed in certain situations.
:: Janette Burns (j.burns@pkffpm. com) is associate director at PKFFPM (www.pkffpm.com). The advice in this column is specific to the facts surrounding the question posed. Neither The Irish News nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.
