Applying New CGT Rules

The June Budget introduced some complex changes to capital gains tax (CGT) that apply from 23 June 2010. For disposals made on or after that date there are now three alterative tax rates for individuals.

Taxable income and gains after deduction of allowances up to £37,400 are taxed at 18%. Those over the £37,400 limit are taxed at 28% and gains subject to entrepreneur's relief are taxed at 10%.

The old CGT rate of 18% applies to all capital gains made by individuals and trustees from 6 April 2008 to 22 June 2010 inclusive, irrespective of the amount of the gain or the person's level of income. Trustees pay CGT at 28% on all gains made on or after 23 June 2010 irrespective of the level of income of the trust.

The new higher rate of 28% only applies to individuals where their total taxable income and gains exceed the higher tax rate threshold of £37,400. That sum includes the total income for the full tax year less allowances and all allowable deductions, plus all capital gains made on or after 23 June less your annual CGT exemption of £10,100. Any gains made before 23 June 2010 are not included in this total. You can choose how to set-off any losses and your annual CGT exemption so you pay the minimum amount of tax. This is best illustrated by an example:

Example
Sid's taxable income for 2010/11 is £27,400 after his personal allowance and all tax allowable expenses have been deducted. He sold a property in May 2010 that made a gain of £17,000, and sold another property in November 2010 for a gain of £25,100. Neither property qualifies for entrepreneurs' relief or for the exemption as his main residence. Sid has no capital losses to use in 2010/11. The CGT on those gains is calculated as follows:

The first gain of £17,000 in May 2010 will be taxed at 18%. The second gain in November 2010 of £25,100 plus his taxable income of £27,400 exceed the higher rate threshold of £37,400 by £15,100 and are liable to the higher 28% rate. As such it makes sense to deduct the CGT annual exemption of £10,100 from the second gain so that only £5,000 of the gain is taxed at 28%. The remainder of the gain of £10,000 will be taxed at 18%. If Sid has any CGT losses he could also have chosen to offset those against the second gain to maximise relief at 28% rather than 18%.