REV BN 32: Captial Gains Tax (CGT) Simplification
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1. This Budget Note covers the following aspects of CGT simplification:
Legislation on the first four items will be introduced in Finance Bill 2003. REPORTING REQUIREMENTS FOR CHARGEABLE GAINS 2. Who is likely to be affected? Individuals, the trustees of settlements, and personal representatives of deceased individuals who have to complete a tax return, but who have no CGT liability. 3. General description of the measure. There will be fewer circumstances where the Capital Gains pages of a tax return need to be filled in. Individuals will not normally have to fill them in for any tax year in which the total of their chargeable gains, after any taper relief has been applied, does not exceed the annual exempt amount (AEA) unless either their proceeds from disposing of assets which are not CGT-exempt in the year exceed four times that amount, or they have allowable losses to set off against their gains for that year. Corresponding rules will apply for personal representatives and trustees of settlements. 4. Operative date. For tax returns for the tax year 2003-04 onwards. 5. Current law and proposed revisions. Section 3(6) of the Taxation of Chargeable Gains Act 1992 (TCGA) provides that individuals do not normally have to complete the Capital Gains pages of a tax return if:
6. Corresponding provision is made in section 3(7) of the TCGA for the personal representatives of deceased persons in the tax year of death and the following two years, and in Schedule 1 to the TCGA for trustees of settlements. The AEA which applies for personal representatives in such circumstances is the same as that which applies to individuals, but trustees of most settlements have an AEA which is half this amount. Certain settlements for disabled people have the AEA which applies to individuals, and there are special anti-fragmentation rules in Schedule 1 which ensure that certain settlements having a common settlor have an AEA which is an appropriate fraction of the amount it would be if they were not linked in this way. 7. Under the new provisions, the disposal proceeds limit will in all cases be increased to four times the AEA which applies to individuals. Individuals, trustees, and personal representatives (for the year of death and the following two years) will not normally have to complete the Capital Gains pages of their tax returns if: · the total of their proceeds from disposals in the tax year in question of assets which are not CGT-exempt does not exceed the new disposal proceeds limit; and either
or · there are no allowable losses which must be deducted from their chargeable gains and there is no CGT liability after any available taper relief has been applied. 8. Disposals of assets from husband to wife, or vice versa, will not count towards the disposal proceeds limit if they are treated for CGT purposes by section 58(1) of the TCGA as changing hands for such an amount that neither a gain nor a loss arises on the disposal. Section 58 applies where the disposal is made in a tax year in which the couple are, at some time, living together as husband and wife. The "living together" requirement is met if the couple are not legally separated or otherwise separated in circumstances which are likely to become permanent. TAPER RELIEF: DEFINITION OF BUSINESS ASSETS 9. Who is likely to be affected? Individuals, the trustees of settlements, and personal representatives of deceased individuals who own assets other than shares or securities. 10. General description of the measure. The rules which determine whether assets other than shares or securities qualify as business assets for CGT taper relief purposes are to be relaxed so that a wider range of assets will qualify. Assets used wholly or partly for the purposes of trades carried on by individuals, trustees of settlements, personal representatives or certain partnerships will qualify as business assets irrespective of whether the owner of the asset is involved in carrying on the trade concerned. 11. Operative date. The new definition will have effect in relation to periods of ownership from 6 April 2004 onwards, and will apply to disposals on or after that date. 12. Current law and proposed revisions. Paragraph 5 of Schedule A1 to the TCGA sets out the conditions which determine whether assets (other than shares or securities) held by an individual, the trustees of a settlement, or the personal representatives of a deceased person are business assets for taper relief purposes. 13. Everything that qualifies as a business asset under the current rules will qualify as a business asset under the new rules. The main change is that an asset owned by an individual, the trustees of a settlement, or the personal representatives of a deceased person will qualify as a business asset under the revised rules at any time when it is used wholly or partly for the purposes of a trade carried on by:
14. Paragraph 6 of Schedule A1 defines "qualifying company". For example, all unlisted trading companies and unlisted holding companies of trading groups are qualifying companies. The new measure will not make any changes to the rules for qualifying companies. CARRY BACK OF LOSSES ON RIGHTS TO UNASCERTAINABLE DEFERRED CONSIDERATION 15. Who is likely to be affected? Persons within the charge to CGT who incur losses on disposing of rights to future payments if the amount of the payment in question could not be determined at the time they received the right. Such rights are sometimes known as "rights to unascertainable deferred consideration". 16. General description of the measure. Taxpayers will be able, in certain circumstances, to set off allowable losses arising on disposals of rights to unascertainable deferred consideration against certain chargeable gains made in one or more tax years ending before the one in which the loss in question arises. The measure will not apply where the right was obtained second-hand, and will not apply at all to rights acquired by companies within the charge to corporation tax on their chargeable gains. 17. Operative date. The new measure will apply for such losses arising on or after 10 April 2003. 18. Current law and proposed revisions. Where an asset is disposed of wholly or partly for a right to unascertainable deferred consideration the market value of the right at the time of the disposal is included in the calculation of the chargeable gain arising on the disposal of the asset. Where the right is itself disposed of in a later tax year and a loss arises (by reference to the original market value of the right) the loss cannot normally be set off against the gain on the original asset. That is because capital losses which arise in one tax year can be set off against chargeable gains of an earlier tax year only in very exceptional circumstances. 19. The new measure will allow a person to elect, if certain conditions are met, for an allowable loss which arises in one tax year to be treated for CGT purposes as though it arose in an earlier year. The main conditions are:
20. It is possible for chargeable gains arising on part-disposals of the original asset to have arisen in different tax years. Where this occurs the election will have effect to treat the loss as though it arose:
21. Any part of the loss which is not set off against gains of the year in which it is treated as having arisen may be set off against gains in later years in the usual way, subject to one restriction. It can be set off against gains of an "intervening year" - that is, any tax year between the tax year in which the loss is treated as arising and the tax year in which it actually arose - only if the person concerned realised a gain on a disposal of the original asset and had a CGT liability in that "intervening year". TREATMENT OF CERTAIN "EARN OUT" RIGHTS AS SECURITIES 22. Who is likely to be affected? Any person who sells shares or debentures to a company for an "earn-out" right. For this purpose, an "earn-out" right is, broadly, a right to receive at some future date new shares in, or debentures of, the purchasing company where the value of the shares or debentures depends on the future business results or the future value of the company's assets. 23. General description of the measure. At present, an election can be made for an earn-out right which is obtained in exchange for shares or debentures in certain circumstances to be treated as a security for the purposes of the TCGA. This is so that a capital gains "rollover treatment" can apply. To the extent that this roll-over treatment applies no charge to tax on chargeable gains is crystallised on the exchange of the shares or debentures: the earn-out right is instead treated as being the same asset as those shares or debentures. Under the proposed measure the earn-out right will automatically be treated as a security if the circumstances apply except where an election is made for it not to be treated in this way. The change applies to companies within the charge to corporation tax in respect of chargeable gains as well as to persons within the charge to CGT. 24. Operative date. The new rules will apply for rights conferred on or after 10 April 2003. 25. Current law and proposed revisions. If certain conditions are met a person who sells shares in, or debentures of, one company to another company wholly or partly for an earn-out right may elect under section 138A of the TCGA for the right to be treated as a security of the purchasing company. Where an election has been made in relation to an earn-out right which is later replaced by a new earn-out right, a further election may be made under section 138A (provided that certain conditions are met) for the new right also to be treated as a security. 26. Where an earn-out right is treated as a security and new shares or debentures are issued under the terms of the right, the broad effect is that the new shares or debentures are treated as the same asset as the original shares or debentures. This means that, to the extent that this treatment applies, no charge to tax arises on any gain until the new shares or debentures are eventually disposed of. 27. Under the proposed measure, an earn-out right will automatically be treated as a security of the purchasing company if the conditions are met unless the person on whom it was conferred elects otherwise. In most circumstances, people benefit from electing for earn-out rights to be treated as securities. Treating such rights as securities automatically where the relevant conditions are met will, therefore, be helpful to most people. But the minority who would not benefit will be able to opt out by making an election under the new rules. MONTHLY SAVINGS SCHEMES FOR COMPANY SHARES AND UNITS IN UNIT TRUSTS 28. Who is likely to be affected? Individuals and others within the charge to CGT who make regular payments into a savings scheme to acquire company shares, or units in an authorised unit trust. 29. General description of the measure. New guidance will be available to help with the calculation of CGT liabilities when disposals are made of shares or units acquired through such a scheme. 30. Operative date. The guidance will be published on the Inland Revenue web-site in time for people who need to report their gains and losses for the tax year 2002-03. In due course it will be revised and published as a CGT Help Sheet to accompany the guidance for completing the Capital Gains pages of the tax return for the tax year 2003-04. 31. Details. Calculating capital gains and losses arising on disposals of shares and units can be a complicated and time-consuming task if the holding has been built up through several acquisitions, as is the case where investments are made via a monthly savings scheme. 32. The new guidance will help investors understand the CGT rules and work out their gains and losses and will supplement that given in the Inland Revenue Statement of Practice SP2/99. It is currently being prepared in consultation with taxpayers' representative bodies. Regulatory Impact Assessment 33. The package of measures will make it simpler and easier for people to comply with their tax obligations, and will reduce the impact that CGT (or, in some cases, corporation tax in respect of chargeable gains) has on those affected. For example, the reversal of the effect of an election in relation to certain earn-out rights will mean that fewer people will need to make an election. And the relaxation of the requirements for completing the Capital Gains pages of a tax return will mean that fewer people will have to complete those pages in circumstances where they do not have a CGT liability. The Government recognises, however, that in some cases an effect of the measures may be to increase compliance costs slightly - for example, the minority of people who would be disadvantaged by the CGT rollover treatment applicable to certain earn-out rights will now need to make an election in order for it not to apply. Further advice 34. If you have any questions about the changes in this Budget Note, please contact the Public Enquiry Unit on 020 7438 6420 to 6425.
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