Capital gains tax (CGT) rates
The current rates of CGT are 18% to the extent that any income tax basic rate band is available and 28% thereafter. The rate for disposals qualifying for Entrepreneurs’ Relief is 10% with a lifetime limit of £10 million for each individual.
CGT annual exemption
The CGT annual exemption will increase to £11,100 for 2015/16.
CGT – Entrepreneurs’ Relief (ER)
Gains which are eligible for ER, but which are deferred into investments which qualify for the Enterprise Investment Scheme or Social Investment Tax Relief can now remain eligible for ER when the gain is realised. This applies to qualifying ER gains on disposals on or after 3 December 2014 which are deferred into either scheme.
CGT – Restricting ER
ER will not be available to reduce CGT on gains which accrue on personally owned assets used in a trading business carried on by a company or a partnership, unless they are disposed of in connection with a disposal of at least a 5% shareholding in the company, or a 5% share in the partnership assets. This measure will affect disposals on and after 18 March 2015.
To obtain ER on a personally owned asset used in a trading company or partnership there has to be a genuine withdrawal from participation in the company or partnership. The measure therefore clarifies what is allowed for a valid ER claim to be made.
CGT – ER on joint ventures and partnerships
Amendments are to be made for ER purposes to the definition of a trading company or holding company of a trading group. This will be determined by reference to that company’s own activities (or the activities of the group.)
The aim is to exclude the activities carried on by joint venture companies in which a company is invested, or of partnerships of which a company is a member. Therefore a company will need to have a significant trade of its own in order to be considered as a trading company. It does not, however, affect shareholdings in companies whose investment in a joint venture is part of their own trade. This measure will affect disposals on and after 18 March 2015.
CGT – non-residents and UK residential property
Following consultation the government has confirmed that from 6 April 2015 non-UK resident individuals, trusts, personal representatives and narrowly controlled companies will be subject to CGT on gains accruing on the disposal of UK residential property on or after that date. Non-resident individuals will be subject to tax at the same rates as UK taxpayers (28% or 18% on gains above the annual exemption). Non-resident companies will be subject to tax at the same rates as UK corporates (20%).
CGT – Principal Private Residence Relief (PPR)
The government has decided that some changes are required to the rules determining the circumstances when a property can benefit from PPR. The changes will apply to both a UK resident disposing of a residence in another country and a non-resident disposing of a UK residence.
From 6 April 2015 a person’s residence will not be eligible for PPR for a tax year unless either:
the person making the disposal was resident in the same country as the property for that tax year, or
the person spent at least 90 midnights in that property.
The main point of the changes to the PPR rules is to remove the ability of an individual who is resident in, say, France with a property in the UK as well as France to nominate the UK property as having the benefit of PPR. Any gain on the French property is not subject to UK tax anyway and, without changes to the PPR rules, the gain on the UK property could be removed by making a PPR election.
The good news is that the latest proposals retain the ability of a UK resident with two UK residences to nominate which of those properties has the benefit of PPR.
Changes to the tax treatment of pension funds on death
If an individual has not bought an annuity, a defined contribution pension fund remains available to pass on to selected beneficiaries. Inheritance tax (IHT) can be avoided by making a ‘letter of wishes’ to the pension provider suggesting to whom the funds should be paid. However, currently there are other tax charges to reflect the principle that income tax relief would have been given on contributions into the pension fund and therefore some tax should be payable when the fund is paid out. In some situations tax at 55% of the fund value is payable.
The government has introduced significant exceptions from the tax charges (in the Taxation of Pensions Act). Generally the changes take effect where the first payment to a beneficiary is on or after 6 April 2015.
Under the new system, anyone who dies under the age of 75 will be able to give their remaining defined contribution pension fund to anyone completely tax free, whether it is in a drawdown account or untouched. This is subject to the condition that the fund is transferred into the names of chosen beneficiaries within two years. The fund can be paid out as a lump sum to a beneficiary or monies taken out of the fund by the beneficiary when required.
Those aged 75 or over when they die will also be able to pass their defined contribution pension fund to any beneficiary who will then be able to draw down on it as income whenever they wish. They will pay tax at their marginal rate of income tax when the income is received. Beneficiaries will also have the option of receiving the fund as a lump sum payment, subject to a tax charge of 45%.
Changes to the tax treatment of annuities on death
Draft legislation has been issued which changes the tax treatment when an annuity continues to be paid after death. The changes mirror the changes to the treatment of pension funds passing to beneficiaries on death. For example beneficiaries of individuals who die under the age of 75 with a joint life or guaranteed term annuity will be able to receive any future payments from such policies tax free.
The changes apply where the first payment to a beneficiary is on or after 6 April 2015.
Inheritance tax and deeds of variation
The government will review the uses of deeds of variation as these can currently be used to avoid IHT charges.