There have been a number of changes recently to the rates of capital gains tax such that matters can become a little confused as the rate that can be used for any particular transaction. Therefore we believe it would be appropriate to summarise the rates of tax applicable and to indicate the various circumstances in which these rates will apply.
10% - Entrepreneurs Rate
This rate is still available to those who make qualifying disposals. This rate will apply to sales of shares in qualifying companies, and for the sale of unincorporated businesses where that sale is to an independent third party.
As a reminder the conditions which need to be satisfied must be satisfied for the twelve months prior to the disposal. In the case of an unincorporated business this condition is basically that it is conducting a trading activity. For the sale of shares, the person disposing the shares must, in the 12 months prior to disposal have held more than 5% of the ordinary share capital, and be a full time employee or officer (director) of the company. Furthermore the company must be a trading company (this does not include property rental companies).
As we have indicated in previous newsletters, this rate is not available where the disposal of an unincorporated business is to a connected company.
One of the main advantages of this relief is that it is available for the first £10 million of qualifying gains.
18% and 28% - Residential property only
These two rates were previously the main rates of Capital Gains tax. Now they will only apply to any gains made on the disposal of residential property with effect from 6th April 2016.
The actual rate used is dependent on the level of income of the taxpayer in the tax year of disposal. If the taxpayer has any of the basic rate income tax band unused then that amount of any gain will be liable to tax at 18% with the remainder at 28%.
To allay any fears you may have, the Main Domestic residence relief will still be available on the sale of a taxpayer’s main residence but clearly this rate will apply to anyone selling a second property, such as a holiday home or indeed can apply to the main residence if the circumstances are such that full relief is not available.
Furthermore this may be seen as an additional attack on buy to let landlords who, after the recently announced changes to interest relief (and SDLT on additional properties) may wish to dispose of properties within their portfolio to minimise the impact of these changes and thus triggering a capital gains tax charge.
10% and 20% - Main rates
These rates can be regarded as the main rates of Capital gains tax. With the exception of the entrepreneurs rate and the higher rates on residential property, these rates will apply to all other gains.
The actual rate used is determined as described above for the residential property rates but the two rates are 10% and 20% as opposed to 18% and 28%.
Unlike Entrepreneurs rate of capital gains tax, the amount of gain in these circumstances which is taxed at 10% is limited to the amount of unused basic rate income tax band.
For example a taxpayer with income of £35,000 will have £8,000 of their basic rate band unused. Therefore, after the deduction of the annual allowance, the first £8,000 of any gains made will be liable at 10% and the remainder at 20%.
If a taxpayer has income and gains which exceed the additional rate threshold for income tax of £150,000 there will be no increase in the capital gains rate, the top rate for this type of disposal is 20%.
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