Calculating CGT

Prior to Gordon Brown's March 1998 Budget, Capital Gains Tax(CGT) was a fiendishly complicated, expensive to operate tax which raised only a few hundred million pounds for the Inland Revenue and only affected a small proportion of the population. However, Gordon was obviously unwilling to leave CGT alone. Following changes in 1998, 2000 and 2002, it remains a fiendishly completed, expensive to operate tax which raises only a few hundred million pounds for the Inland Revenue and only affects a small proportion of the population.

The latest alteration to the CGT regime, in 2002, was to make the taper relief available for business assets even more generous. However, the big change to CGT was the withdrawal of the indexation allowance to offset the impact of inflation as of 5/4/98 and the introduction of a taper relief instead. This is a lot more generous for business assets than for non-business assets.

A business asset is defined as: an asset used for the purposes of a trade carried on by you alone or in partnership or by a qualifying company owned by you; an asset held for the purposes of a qualifying full time office or employment; or a qualifying investment in shares. All shareholdings in AIM companies, in unquoted trading companies and shareholdings by employees in quoted trading companies are counted as business assets. Shareholdings by outside investors are also business assets if the holding is a stake of 5% or more in the company.

The following table shows how the tax liability comes down over a ten-year period for non-business assets and over a two-year period for business assets.

The amount chargeable to CGT is added onto the top of your income liable for income tax and is charged at the following rates:

• below the starting rate at 10%,
• between the starting rate and basic rate limits at 20%,
• and above the basic rate limit at 40%.

The taper relief has the effect, after two years of bringing down the equivalent tax rate on business assets to 10% for higher rate taxpayers and 5.5% for basic rate taxpayers. On non-business assets the rates come down after ten years to 24% for higher rate taxpayers and 13.2% for basic rate taxpayers.

The taper relief works like this. Let's say you purchased an asset in 1995 for £40,000 and sold it prior to April 2002 for £100,000. You still qualify for relief under the indexation allowance for the period from 1995 to April 1998. This is calculated at £3,640. The holding period for taper relief is four years, 1998, 1999, 2000 and 2001.

The chargeable gain is worked out like this:

Proceeds - £100,000
Less Cost - (£40,000)
£60,000
Less Indexation (£3,640)
£56,360

Non-business asset

90% x £56,360 gives a chargeable gain of £50,724.

Business asset

25% x £56,360 gives a chargeable gain of £14,090.

For a higher rate taxpayer, that would mean a tax bill of £20,289.60 on disposal of a non-business asset and of £5,636 on a business asset. Against this bill you could offset any relevant capital losses and your CGT personal allowance (£8,200 for 2004/2005).

You are already receiving the maximum taper relief for business assets. Had you decided to hold on to your asset until the year 2008 giving a holding period for taper relief of ten years, offering the maximum relief for non-business assets, the sum would look like this. Let's assume your selling price is now £140,000 thanks to the longer holding period.

Proceeds £140,000
Less Cost (£40,000)
£100,000
Less Indexation (£3,640)
£96,360

Non business asset

60% x £96,360 gives you a chargeable gain of £57,816.

For a higher rate taxpayer, that would mean a tax bill of £23,126.40 on disposal of a non-business asset.