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How To Cope With The CGT Changes

Capital gains tax (CGT) has undergone a major reform with substantial changes which will apply to individuals from 6th April 2008. The Chancellor announced in his pre budget report a rate of capital gains tax of 18% and the abolishment of indexation allowance and taper relief. The Chancellor has bowed to pressure and announced the addition of an “entrepreneurs’ relief” to his CGT proposals. Entrepreneurs’ relief will charge CGT at 10% for gains on certain business assets up to the first £1 million of lifetime capital gains. The annual capital gains exemption of £9,200 will continue.

Who is affected by the New Rules
The new rules will apply to all individuals making gains on disposals of assets after 6th April 2008. The entrepreneurs’ relief will only be available to individuals in respect of gains made on disposals of business assets. Note that for sale of land, it is the date of exchange of contracts not the date of completion that is relevant.

Selling Surgery assets before 6th April 2008
If a GP sells their share of the surgery premises before 6th April 2008, they will benefit from indexation allowance and business taper relief. Indexation allowance increases the cost of the surgery by the effect of inflation up to 31st March 1998. If the surgery has been owned for more than two years after April 98, business taper relief is available and 75% of the gain is exempt from capital gains tax. For example if a GP purchased a surgery in March 1982 for £150,000 and its value now was £600,000 then after indexation, business taper relief and annual exemption the gain liable to capital gains tax would be £64,000 and capital gains tax at 40% would be £25,600.

Selling Surgery assets after 6th April 2008
From 6th April 2008 indexation and business taper relief is abolished and the difference between the proceeds and original cost will be taxed at a rate of 18%. However for business assets used in a GPs trade, entrepreneurs’ relief will be available which will reduce the gains liable to capital gains tax by 4/9ths, resulting in an effective rate of 10%. In the above example the gain of £450,000 will be reduced by 4/9th giving a chargeable gain of £250,000, after the annual exemption the capital gains tax at 18% is £43,344. This is still an increase of tax of £17,744 due to the loss of indexation allowance.

A GP will be able to make claims for entrepreneurs’ relief on more than one occasion up to a lifetime total of £1million of gains. Disposal of business assets after the lifetime limit will be chargeable to capital gains at 18%.

The relief only applies to disposal of business assets, if a GP decides to keep their practice premises as an investment and leases to the remaining partners, then the relief will be lost, and any future disposal will be charged at 18%.

Putting Surgery Assets into a separate company
If a GP has a large gain sitting in their surgery, they could think about crystallising the gain before 5th April 2008 to get the benefit of the indexation allowance and business taper relief. In the above example if this GP sold his surgery to a company before 6 April 2008, would have capital gains tax to pay of £25,600 and stamp duty land tax (SDLT) of £24,000. However, his company now owns the surgery at a cost of £600,000, so no further tax will be payable unless the value increases above £600,000 and then only on the increase. There are costs attached to this course of action, legal fees, and accountancy fees for the company.

GPs Personal Investments
GPs disposing of non business assets, for example buy to let properties may be better off waiting until after 6th April 2008 for the following reasons: Non business assets presently and until 5 April 2008 attract non-business taper relief which reduces gain by a maximum of 40% after 10 years of ownership. Accordingly, at the greatest relief, CGT is payable at 60% of the gain at a rate of 40%tax ie 24% overall rate of tax compared to the new proposed 18%.

  Disposals before 5th April 08 Disposals after 6th April 08
Business Assets    
Relief’s Available Indexation Allowance up to March 1998 Entrepreneurs’ Relief – 4/9ths of gain exempt up to lifetime limit of £1million
  Business taper relief – 75% of gain exempt after 2 yrs  
     
Rate of Tax Higher rate tax payer – effective rate 10% Higher rate tax payer – 18%
  Basic rate tax payer – effective rate 5.5%

Basic rate tax payer – 18%

     
Non-Business Asset    
Relief’s Available Indexation Allowance up to March 1998 None
  Non Business taper relief for assets held more than 4 years after 6th April 1998, maximum 10yrs.  
     
Rate of Tax Higher rate tax payer – 40% to 24% depending on number of years held Higher rate tax payer – 18%
  Basic Rate tax payer – 22% to 13.2% depending on number of yrs held Basic rate tax payer – 18%

 

This article was written by Jenny Stone, ACA