Factsheets

8.2 Capital gains tax

A capital gain arises when certain capital (or 'chargeable') assets are sold at a profit. The gain is the sale proceeds (net of selling costs) less the purchase price (including acquisition costs). From this a deduction is made to reduce the gain to an amount which is taxable.

In the 2007 Pre-Budget report  it was announced that their will be radical reforms to the CGT system for 2008/09. The reforms include the abolition of taper relief and indexation allowance for CGT and the introduction of a flat rate of CGT for individuals of 18%. Details of the proposed changes are outlined in the factsheet Capital Gains Tax Reform. Please do get in touch for more information on how these changes will affect you.

This factsheet is relevant for disposals up until 5 April 2008.

How Taper Relief Works

Taper relief is based on the length of ownership and reduces the gain by a percentage. The percentage depends on the period of ownership of the asset and the type of asset - the percentage relief is higher for business assets (see definition below).

The pre-1998 system involved the deduction of an indexation allowance based on the increase in the retail prices index over the period of ownership of the asset. It was designed to remove the inflationary element of any gain.

Where assets are sold after 5 April 1998 but were originally purchased before that date the calculation has to accommodate both sets of rules. Indexation is calculated up to April 1998. This is deducted from the gain before taper relief is deducted.

Amount of taper – non-business assets
Taper relief is given by reference to the number of complete years of ownership after 5 April 1998. In addition a bonus year is added where the asset was acquired before 17 March 1998 (Budget Day).

The taper relief table is as follows.

Number of complete years asset held after 5.4.98 (including 'bonus' where relevant)	Non-business taper %
1	0
2	0
3	5
4	10
5	15
6	20
7	25
8	30
9	35
10 or more	40

 

 

 

 

 

Example
Bruce sold some shares in Glaxo plc for £19,000 in August 2007. They were acquired in 1984 for £5,000.

	£
Sale Proceeds	19,000
Less: Cost	(5,000)
	_________
	14,000
Less:  Indexation (say)	(4,000)
(to April 1998)	_________
	10,000
Less: Taper relief (4,000)
x (9 years + bonus year 40%)
	__________
Chargeable Gain	£6,000

Amount of taper – business assets
For disposals of business assets there is a different table.

Number of complete years asset held after 5.4.98	Business taper %
1	50
2 or more	75

Example
Bruce sold his 30% shareholding in Gordon Ltd for £190,000 in August 2007. It was acquired in 1984 for £50,000.

	£
Sale Proceeds	190,000
Less: Cost	(50,000)
	___________
Less: Indexation (say)	140,000
(to April 1998)	(40,000)
	___________
	100,000
Less: Taper relief	(75,000)
(2 years = 75%)
	___________
Chargeable Gain	£25,000

The CGT regime is therefore very attractive provided that the asset has been a business asset throughout the period of ownership (or since April 1998 if acquired earlier than April 1998).

Definition of Business Asset

The following assets are currently eligible for business asset taper relief:

•  one used for the purposes of an individual's (or partnership's) trade

•  an asset owned by an individual but used in the individual' ...