FAQs: Capital Gains Tax (CGT) Reform announced in the Pre-Budget Report (PBR) 2007

Contents

Q. If I make a no gain/no loss transfer on or before 5 April 2008, for instance, a transfer to my husband/wife, will he/she retain the benefit of any indexation allowance due on the transfer?

A. Indexation allowance will not be stripped out when the person who acquires the asset under a no gain/no loss transfer disposes of it after 5 April 2008. For example, in the case of an inter-spousal transfer, indexation allowance will continue to be included, where applicable, in arriving at the allowable cost to the transferee spouse.

Q. How will deferrals under Enterprise Investment Scheme (EIS) be treated?

A. EIS deferral relief remains unchanged. Where the chargeable gain to be deferred arises before 6 April 2008 indexation allowance will be available, where appropriate.

A chargeable gain is the gain after other reliefs and deductions etc, but is not the taxable amount after taper relief has been applied. Taper relief under section 2A is applicable where a person has net chargeable gains after deduction of allowable losses in a year of assessment. But taper relief will not be available for the tax year 2008-09 and later years. So if the deferred gain becomes chargeable on or after 6 April 2008 there will be no taper relief available.

Q. How will the gain be calculated for a non-domiciled individual with overseas assets if the gain arises in this tax year but is remitted next tax year?

A. A gain arising to a non-domiciled individual in the current tax year, 2007-08, will be calculated under the usual rules, and indexation allowance will be available where appropriate. But that gain is chargeable in the next tax year, 2008-09, because the individual remits the gain in that year. No taper relief will be available and the single 18 per cent CGT rate will apply.

Q. How will the share identification rules work?

A. When an individual sells some, but not all, of his shares, or other securities, in a company, and has acquired the shares at different times, the share identification rules match the shares disposed of with particular acquisitions, in order to determine what expenditure is taken into account in computing the gain or loss on the disposal.

In matching shares disposed of on or after 6 April 2008 with acquisitions, all shares, of the same class in the same company, acquired before the date of disposal will be pooled to form a single asset, described as a section 104 holding. So if someone had acquired 4,000 shares in March 2005 for £5,000 and a further 6,000 shares of the same class in the same company in September 2006 for £26,000, he will be treated as having a section 104 holding of 10,000 shares with a cost of £31,000.

If he sells 4,000 of the shares in June 2008, then, assuming that he has not acquired more shares on the date of disposal or within the 30 days following the disposal, for which special rules apply, for CGT purposes he will be treated as disposing of part of the section 104 holding. The expenditure deductible in computing the chargeable gain or loss on the disposal in June 2008 will be £31,000 x 4,000/10,000 = £12,400 (using the simple method of apportionment described in paragraph CG50728 of the HMRC Capital Gains Manual).

Q. I have shares in a company that I acquired at various times between 1977 and 2005. How do I calculate the costs in the new pool (section 104 holding)?

All shares held at 31 March 1982 and which you still hold at 6 April 2008 will go into the new section 104 holding with costs based on their market value at 31 March 1982.

All shares acquired since that date are brought into the new section 104 holding at their actual cost.

It is possible that shares acquired between 1 April 1982 and 5 April 1998 have constituted an old section 104 holding. Such an old holding will contain two pools of expenditure, the pool of qualifying expenditure and the pool of indexed expenditure. Because of the abolition of indexation allowance, the figure to be taken into the new section 104 holding is the pool of qualifying expenditure.

Q. Will HMRC be drafting any anti-avoidance legislation to prevent people taking advantage of the current CGT rules?

A. It is recognised that by pre-announcing the proposed reforms, taxpayers have a six-month opportunity to arrange their affairs, for instance, to make disposals in the current tax year, if they wish.

Q. Will HMRC be introducing an anti-avoidance measure to prevent income being turned into capital?

A. There are already a number of tax rules to counter schemes to convert income into capital gains. However, the Chancellor has asked officials to continue to monitor the CGT rules and reliefs to ensure they cannot be abused by those who wish to pay less than their fair share of tax.

Q. I’m selling a property. What is the date of disposal?

A. Where you sell a property under an unconditional contract the date of disposal for capital gains purposes is the date on which you exchange contracts. Where the contract is conditional the date of the disposal is the date on which the last of the conditions is met.

Guidance is available in the Capital Gains Manual on conditional and unconditional contracts.

Q. In PBR Notice 17 you mentioned that private residence relief is unaffected by the proposed changes. What about letting relief?

A. Letting relief is unaffected by the proposals.

Q. How is the CGT part of the paper version of the Self Assessment Return for individuals being changed for 2007-08 returns and returns for later years?

A. The CGT part of the paper version of the Self Assessment Return for individuals is being simplified. For these returns for 2007-08 and later years this part of the return will consist of two pages replacing the current eight pages and split into four sections:

  • summary of a taxpayer’s enclosed computations
  • listed shares and securities
  • unlisted shares and securities
  • property and other gains

In addition, individuals must also provide their own computations, either in an any other information - white space - area at the end of the two pages or as a separate enclosure with the return.

The CGT pages will be supported by capital gains summary notes which will provide a general overview of the tax together with guidance on how to complete those pages. Those notes will also contain a working sheet for simple calculations of a gain or loss on the disposal of an asset. The notes will explain that more guidance can be found in the capital gains help sheets and the manuals on our website.

For the 2007-08 Self Assessment Return and later years it will also be possible for individuals to file their returns including the capital gains tax pages online using HMRC software. There will also be a facility to send attachments using this software.

Q. What will HMRC consider reasonable rearranging of affairs where a clearance has been given under section 701 ITA 2007 (or section 707 Income and Corporation Taxes Act (ICTA) 1988)?

A. A clearance under section 701 (or section 707) confirms that HMRC are satisfied that no counteraction should be taken under section 698 (or 703) about the transactions in securities that are described in the application for clearance.

The provisions in Chapter 1 of Part 13 ITA 2007 are concerned with income tax but not capital gains tax (and since 6 April 2007 Chapter 1 of Part 17 ICTA 1988 is concerned only with Corporation Tax (CT)).

No one is required to apply for clearance but we receive thousands of clearance applications each year from people who value the certainty it provides. The clearance we give relates only to the transactions described to us in the application.

It is not possible to give a blanket statement of the view we will take where additional transactions not covered by the clearance are effected in order to take advantage of the current CGT rules. It will be a matter for judgement, in the light of the facts and circumstances of the particular case, whether the clearance given needs to be revisited and counteraction considered either for the original transactions or for the combined effects of the original and additional transactions.

In the circumstances described in the question above, we will not normally refuse clearance for disposals of loan notes, issued in a transaction for which we originally gave clearance before October 2007, if those disposals.

  1. Do not provide any additional opportunity to take consideration in a form free of income tax (even if they result in consideration being received earlier).
  2. Are in essence motivated by a desire to take advantage of the current (pre-6 April 2008) CGT rules.
  3. Take place between 9 October 2007 and 5 April 2008.

The sale of loan notes to a company controlled by the vendor is an example of a disposal that may fail to meet 1. above, as it may give the vendor the opportunity to receive consideration in a form free of income tax that could have been paid as a dividend by the holding company.

Where greater certainty is required, we will be happy to consider a revised clearance application under section 701 (or section 707) including particulars of all the transactions. Applicants are reminded, however, that February/March is always a popular time for making clearance applications (and especially this year), so it is particularly important to apply in good time.

Q. What will be the maximum surcharge for offshore trusts for the purposes of Section 91 of the Taxation of Chargeable Gains Act 1992?

A. The surcharge under section 91 is set at a rate of 10 per cent a year of the CGT due, for up to six years. So at the proposed 18 per cent CGT rate the maximum effective rate will be 28.8% (18% + [6 x 1.8%] = 18% + 10.8% = 28.8%)