Home > > 12 March 2008 Budget Report > Capital Taxes

Capital Taxes

Inheritance tax
Unused nil-rate band
Transitional serial interests in trusts
Capital gains tax
Entrepreneurs' relief
Capital gains tax losses

Inheritance tax

Annual exemption

The exemption for 2008/09 is £312,000 (2007/08 £300,000).

Unused nil-rate band

As announced in the 2007 pre-Budget Report, with effect from 9 October 2007, if an individual's inheritance tax nil-rate band is not used up on their death, the unused proportion can be transferred to their surviving spouse or civil partner. The measure also applies to all widows, widowers and bereaved civil partners alive on 9 October 2007.

Transitional serial interests in life-interest trusts

The transitional period is extended by six months to 5 October 2008. This means that taxpayers now have an extra six months to change the life tenant of a trust if that is desirable and still have the old rules apply so that the income will still be assessable on the life tenant and the assets of the trust will still be included in the estate of the beneficiary. The rules where this occurs are also going to be clarified.

Capital gains tax

Annual exemption and rate of tax

The annual exemption for 2008/09 is £9,600 (2007/08 £9,200). This rate applies for individuals, personal representatives of deceased persons and trustees of certain settlements for the disabled. The annual exempt ammount for most other trustees is increased to £4,800.

The rate of capital gains tax for 2008/09 is 18%, reduced from a maximum for 2007/08 of 40%. There is now in addition, a new entrepreneurs' relief which will reduce the effective tax rate on some gains to 10%.

Entrepreneurs' relief

Details have been awaited for some time of the new relief for the disposal of businesses and business assets which will apply from 6 April 2008. Now that that draft legislation is available it is clearer what will - and what will not - attract relief.

The relief is available where an individual (or in certain circumstances, a trustee) makes a 'material disposal' of his or her business. This includes the sale of the business as a whole, the sale of an interest in a partnership, and the sale of shares in a qualifying company. To qualify for relief on the sale of shares, the shareholder must own at least 5% of the ordinary share capital in the company, and as a result can exercise 5% of the voting power, and be an officer or employee of the company. The company must be a trading company or holding company of a trading group as currently defined for business asset taper relief.

The conditions of ownership need to be in place for at least 12 months before the disposal for relief to be available.

Where the material disposal comprises a sale of shares or of a share in a partnership, the disposer can also claim relief against the gains on the disposal of an asset which was used in the business. The later disposal can take place within three years of the disposal of the business interest, although the relief is restricted where rent has been charged on the property.

The sale of assets without the sale of the business, or the cessation of trade will not qualify for relief. This will affect farmers who sell off parcels of land, which presently qualifies for taper relief, but will not attract any relief after 5 April 2008.

As already announced, the relief will be available against gains on the disposal, and will be a limited to a lifetime amount of £1,000,000. The gains subject to relief will be scaled by deducting 4/9 of the amount, leaving 5/9 in charge, and effectively providing a 10% rate of tax on the gross gains.

There are also rules to allow the owner of shares in a company which is the subject of a takeover to elect to be taxed on the sale, allowing the new relief to trigger, and rules to cover business disposals before 6 April 2008, but where the gains on the disposal have been deferred into Qualifying Corporate Bonds or EIS and VCT shares. These will all potentially attract relief under the new rules.

Capital gains tax losses

There will be some relief for foreign capital gains tax losses for non-domiciliaries whether they are taxed on the arising or remittance basis, the latter being subject to an election.