Annual Exemption and Tax Rates

The annual exemption for individuals has been increased to £7,700 for 2002/03 (2001/02: £7,500). Trustees receive half of this figure (£3,850 for 2002/03; £3,750 for 2001/02), although this may be shared between trusts which have been set up by the same person.

CGT continues to be calculated by adding the net chargeable gains for the year to income and using the income tax rates for interest, which will be 10%, 20% or 40% depending on the level of income.

Taper Relief

Taper relief was introduced in 1998 as a replacement for indexation allowance, which reduced gains to take into account the effects of inflation. Taper relief reduces the chargeable gain by a percentage based on the time between acquisition and disposal, so the longer it takes to make a gain, the less the gain is chargeable. Although Gordon Brown promised that this would be a simplification of the rules, taper relief has created a whole new set of complications.

The rates of taper relief are much more favourable for “business assets” than for “non-business assets”. Most investments in shares and property are non-business assets, but an employee who owns shares in his employer enjoys the higher business asset rate from 6 April 2000 onwards.

The business assets taper rates were increased for disposals after 5 April 2000, and they have been increased again for disposals after 5 April 2002. From 6 April 2002, gains on business assets will be tapered by 50% if the asset has been owned for one year, and by 75% if the asset has been owned for two years. This means that a higher rate taxpayer will suffer an effective rate of only 10% on the gain - 25% of the gain will be charged at 40%.

There seems to be no change in the rules which treat most employee shareholdings as non-business assets up to 5 April 2000. This can deny the full benefit of the 75% relief for years to come.

TAX TIP

If you are planning to sell capital assets, make sure you know the whole CGT picture, including taper relief.