Who is likely to be affected
Individuals, trusts and personal representatives who pay Capital Gains Tax (CGT).
General description of the measure
This measure reduces the 18% rate of CGT to 10% and the 28% rate of CGT to 20% for chargeable gains, except in relation to chargeable gains accruing on the disposal of residential property (that do not qualify for private residence relief), and carried interest.
The government wants to create a strong enterprise and investment culture. Cutting the rates of CGT for most assets is intended to support companies to access the capital they need to expand and create jobs. Retaining the 28% and 18% rates for residential property is intended to provide an incentive for individuals to invest in companies over property.
Background to the measure
This measure was announced at Budget 2016.
This measure will have effect for relevant gains accruing on or after 6 April 2016.
Section 4 of the Taxation of Chargeable Gains Act 1992 (TCGA) provides that chargeable gains accruing in the following circumstances are chargeable to CGT at 18% or 28% after deduction of reliefs, losses and the annual exempt amount (where applicable):
18% where a person is not a higher rate taxpayer (section 4(2))
28% to the extent that the person is a higher rate taxpayer or the chargeable gains exceed the unused part of the individual’s basic rate band (section 4(4) & (5))
28% for trustees and personal representatives (section 4(3))
28% for ATED-related chargeable gains accruing to any person (principally companies) so chargeable (section 4(3A))
Receipts of carried interest are charged to CGT by section 103KA of TCGA.
Legislation will be introduced in Finance Bill 2016 to amend subsections 4(2), (3), (4) and (5) of TCGA to reduce the 18% and 28% rates in those provisions to 10% and 20% respectively. This will be subject to exclusions for chargeable gains on disposals of residential property that do not qualify for private residence relief and receipt of carried interest.
Provisions will make clear that a person can use any unused income tax basic rate band in the most beneficial way.
Provisions will also make clear that a residential property interest includes an interest in land that has at any time in the person’s ownership consisted of or included a dwelling and an interest in land subsisting under a contract for an off-plan purchase. Rules will set out how gains should be calculated in the case of mixed use properties. Subsection 4(3A) of TCGA, which applies a 28% rate of CGT to ATED-related chargeable gains, is unchanged by this measure.
Subsection 4(1) and section 169N(3) of TCGA provide for a 10% rate in relation to gains that qualify for entrepreneurs’ relief; and subsection 4(3B) provides for a 20% rate in relation to Non-Residents CGT gains accruing to a company. These rates are also unchanged by this measure.
Summary of impacts
Exchequer impact (£m)
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These figures are set out in Table 2.1 of Budget 2016 and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Budget 2016.
Cutting the rates of CGT for most assets should support companies to access the capital they need to expand and create jobs.
The costing accounts for behavioural responses, including greater realisation of gains, and increased incentive to take capital gains relative to income.
Impact on individuals, households and families
The measure will reduce the CGT liability for individuals who make a variety of transactions liable to CGT during the tax-year, including those disposing of shares and other financial and non-financial assets.
Disposals of residential property and carried interest will be charged at the same rates as they are currently.
The measure is not expected to impact on family formation, stability or breakdown.
The rate cut is not expected to have a disproportionate impact on any income groups. The measure will impact individuals who have accrued gains from the disposal of residential properties and/or have received carried interest from investment funds as they will need to separately identify these gains. These individuals tend to share characteristics with others of above average means.
Impact on business including civil society organisations
This measure is expected to have no negative impact on businesses or civil society organisations as it is aimed at individuals, trustees and personal representatives who pay CGT in their personal or professional capacities. The reduction in CGT rates offered by this measure will make it more attractive for individuals to invest in company shares.
Operational impact (£m) (HMRC or other)
HMRC will need to make changes to its IT systems to implement this change at a cost in the region of £1 million.
Other impacts have been considered and none have been identified.
Monitoring and evaluation
This measure will be monitored through information collected from tax receipts.
If you have any questions about this change, please contact Nick Williams on Telephone: 03000 585660 or email: firstname.lastname@example.org