Fifty-one years ago, Labour MP Harold Wilson oversaw the introduction of capital gains tax (CGT).
Not only was this the year in which Sir Winston Churchill died, but the nation had to mourn the loss of some of the gains they had made on increases to the value of chargeable assets they owned.
According to HM Revenue & Customs, from 1965 to 1982 the basic principle was CGT was charged on the actual gain in pounds (sterling) from the date of acquisition, or 6 April 1965 if later.
In a nutshell CGT is, according to John Devine, investment manager for Thesis Asset Management, “a tax due when the net profits on the assets disposed of during a financial year exceeds the annual exempt allowance”.
It is paid by UK resident individuals on their “worldwide assets”, Joan Foster, partner and chartered tax adviser at RSM UK, adds. Up to a determined level, profits made on qualifying assets are free of tax. CGT is generally payable on 31 January following the end of the tax year of the gain.
As Ms Foster explains for gains realised in the current tax year to 5 April 2017 any CGT would be payable on 31 January 2018.
For a while, indexation of CGT was brought in during then prime minister Margaret Thatcher’s Conservative government in 1982 to make allowance for inflation during the 1970s.
HMRC’s website explains: “The basic principle of indexation is a deduction is made in the computation in respect of inflation.
“This deduction is calculated by multiplying the relevant allowable expenditure by the percentage increase in the Retail Price Index from the date of acquisition of the asset (or in some cases a later date) to the date of disposal.”
For disposals made on or after 6 April 1998, except for disposals made by companies within the charge to corporation tax, the percentage increase only ran to April 1998. The percentage increase was known as the ‘indexation factor’.
However, for disposals made on or after 6 April 2008, except for disposals made by companies within the charge to corporate tax, indexation was withdrawn altogether.
Successive governments have charged CGT, reaching 28 per cent for higher earners and 18 per cent for lower earners in 2010, when the coalition covernment came into power. This was a slight relief - as the Liberal Democrats pre-election had been campaigning for a top rate of 40 per cent CGT.
Budget 2016 - Five Tax Changes At-A-Glance
| Tax | Rates in 2015 Summer Budget | Changes in 2016 Budget |
| Income tax | Personal allowance to increase from £10,800 in 2015/6 to £11,000 in 2016/7. Increases in the main rates of income tax were ruled out but the higher rate threshold from will rise from £42,385 in 2015/16 to £43,000 in 2016/17 and to £43,600 in 2017/18. | The personal allowance will rise from £11,000 in 2016/17 to £11,500 in 2017/18. Meanwhile the higher rate threshold will rise by £2,000 to £45,000 in 2017/18. |
| Pension allowance | Lifetime allowance remained at £1.25m and annual allowance at £40,000. From April 2016 the government said it would introduce a taper to the annual allowance for those with adjusted annual incomes over £150,000. A consultation on whether there is a case for reforming pensions tax relief was launched. | No changes but Lifetime Isa introduced. |
| Capital gains tax | Rates unchanged but the government said it would stop investment fund managers from using tax loopholes to avoid paying the correct amount of capital gains tax on the profits of the fund payable to them. | From 6 April 2016, the higher rate of CGT will be reduced from 28 per cent to 20 per cent, and the basic rate will be reduced from 18 per cent to 10 per cent. Entrepreneurs’ relief will be extended to long-term investors in unlisted companies. This will provide a 10 per cent rate for gains on newly issued shares in unlisted companies purchased on or after 17 March 2016. |
| Inheritance tax | A new transferable nil-rate band will be introduced from April 2017. This will apply when a main residence is passed on death to direct descendants, such as a child or grandchild. The allowance will be up to £100,000 in 2017/18, up to £125,000 in 2018/19, up to £150,000 in 2019/20, and up to £175,000 in 2020/21. There will be a tapered withdrawal of the main residence nil-rate band for estates with a net value of more than £2m. The existing nil-rate band will remain at £325,000 from 2018/19 until the end of 2020/21. | The government will legislate to charge inheritance tax on all UK residential property indirectly held through an offshore structure from 6 April 2017. |
| Tax on savings interest | From April 2016 the government will remove the Dividend Tax Credit and replace it with a new tax-free Dividend Allowance of £5,000 a year for all taxpayers. From April 2016 individuals can receive up to £17,000 of income a year tax-free, and separately invest up to £15,240 per annum through an Isa tax-free. The dividend tax rates will be set at 7.5 per cent for basic rate taxpayers, 32.5 per cent for higher rate taxpayers and 38.1 per cent for additional rate taxpayers. | The Isa allowance will rise from £15,240 to £20,000 in April 2017. Government will change the tax rules so interest from Oeics, authorised unit trusts, investment trust companies and P2P loans may be paid without deduction of income tax from April 2017. The government will legislate to allow the Isa savings of a deceased person to continue to benefit from tax advantages during the administration of their estate. |
In the 2016 Budget, chancellor George Osborne announced the higher rate of CGT would be cut from 28 per cent to 20 per cent, and the basic rate from 18 per cent to 10 per cent, for relevant gains accruing on or after 6 April 2016.
Where taxable gains straddle the income tax bands, the rate of 10 per cent or 18 per cent applies up to that level, and 20 per cent or 28 per cent above.
The CGT exemption amount remains at £11,100 for the 2016 to 2017 tax year.
For trusts, the rate is 20 per cent or 28 per cent for residential property.
However, these reductions do not apply to the sale of residential property in the UK. As Ms Foster explains, new rules which came in on 6 April this year mean non-UK residents are also liable to CGT on gains they realise on the sale of UK residential property.
