Details of the revised section 4 and the new section 4A of TCGA
6.Subsection (1) of the revised section 4 provides for the section to prescribe the rates at which CGT is chargeable, and that the section is subject to section 169N of TCGA (which provides rules for charging CGT on gains qualifying for entrepreneurs’ relief).
7.Subsections (2) to (4) provide that the rate of CGT is 18 per cent, (subject to other provisions of the section), and that the gains of trustees and personal representatives, and individuals liable to income tax at higher rates, are to be charged at 28 per cent.
8.Subsections (5) to (9) have the effect that where an individual’s taxable income for a tax year is less than their basic rate band, gains up to the amount of the unused portion of the basic rate band are charged at 18 per cent. Gains above that limit are charged at 28 per cent. Gains in respect of which entrepreneurs’ relief is claimed, which are taxable at 10 per cent (see paragraph 13 below), are set against any unused amount of the basic rate band before other gains.
9.New section 4A supplements section 4 in cases where income tax liability is reduced by reason of certain reliefs in relation to life insurance policies, capital redemption policies and contracts for life annuities, or certain income of the estates of deceased persons. It ensures that these reliefs are taken into account in determining any unused amount of the basic rate band. Section 4A is modelled on, and has the same effect as, the old section 6 of TCGA which applied for tax years before 2008-09 when the rate of CGT was linked to income tax liability.
10.The revised section 4 and the new section 4A have effect for gains arising on or after 23 June 2010 (paragraph 12).
11.Paragraph 3 of the Schedule inserts a new section 4B into the TCGA. This section provides that a person whose gains for a tax year are chargeable to CGT at more than one rate may deduct any allowable losses and the annual exempt amount for that year in the way that produces the lowest possible tax charge. Existing legislation that limits the way certain losses may be set off continues to apply. New section 4B has effect for the year 2010-11 and later years (paragraph 13).
12.Paragraphs 4 to 8 amend the provisions of the TCGA that provide the rules for entrepreneurs’ relief. Entrepreneurs’ relief reduces the effective rate at which gains on disposals of certain assets are charged to CGT. There are two main changes. First, from 23 June 2010 entrepreneurs’ relief is given by charging qualifying gains at a reduced rate of 10 per cent, whereas before that date the relief was given by reducing the amount of qualifying gains charged at the single rate of CGT prevailing at that time. Second, the lifetime limit on the gains eligible for relief is increased from £2 million to £5 million.
13.Paragraph 4 amends the description of entrepreneurs’ relief in the introductory section 169H, to reflect the change in the way the relief is given.
14.Paragraph 5 amends section 169N of TCGA, which provides the mechanism for giving entrepreneurs’ relief. The effect of the changes is that from 23 June 2010 gains in respect of which entrepreneurs’ relief is claimed are charged at 10 per cent, up to an increased lifetime limit of gains of £5 million. Gains arising before 23 June 2010 that benefited from entrepreneurs’ relief are taken into account in determining whether the lifetime limit has been reached.
15.Paragraphs 6 and 7 amend sections 169O and 169P of TCGA, to remove references to the reduction of the gain made under the previous rules for entrepreneurs’ relief.
16.The changes made by paragraphs 4 to 7 of the Schedule have effect for disposals on or after 23 June 2010 (paragraph 14).
17.Paragraph 8 substitutes a new section 169R in TCGA. That section applies where shares are exchanged for qualifying corporate bonds (QCBs) (for example, on the takeover of a company) and a gain on disposal of the shares could have qualified for entrepreneurs’ relief. QCBs are exempt from CGT. The main CGT legislation provides that the exchange is not treated as a disposal of the shares. Instead, a gain is calculated as though the exchange were a disposal, and comes into charge when there is a disposal of the QCBs.
18.Section 169R, as it stood before these changes, applied if a gain on the disposal of the shares at the time of the exchange could qualify for entrepreneurs’ relief. It had the effect that, if a claim was made, then in computing the deferred gain that comes into charge on disposal of the QCBs, the deduction of 4/9 that gave the effective lower rate for entrepreneurs’ relief should be taken into account, so that entrepreneurs’ relief was effectively given.
19.The changes made by paragraph 8 have the effect that, if entrepreneurs’ relief would be available on a disposal of the shares at the time of the exchange for QCBs, an election can be made for the gain not to be deferred but instead brought into charge at that time and the relief claimed. If no election is made and the gain is therefore deferred, it is likely that in almost all cases the gain will not qualify for entrepreneurs’ relief when it comes into charge at a later date. The new rule has effect where the exchange of shares for QCBs takes place on or after 23 June 2010 (paragraph 15).
20.Paragraph 9 applies where an individual’s gain on a disposal could qualify for entrepreneurs’ relief and could be deferred because the individual invests, within a specified time limit, in shares qualifying under the Enterprise Investment Scheme (“EIS shares”). The deferred gain comes back into charge on the occurrence of any of a number of “chargeable events” (such as a disposal of the EIS shares). Under the entrepreneurs’ relief rules as they stood before these changes, it was possible for a claim for entrepreneurs’ relief to be made in respect of the gain, so that it was reduced by 4/9, and then for that reduced gain to be deferred against investment in EIS shares and come back into charge on the occurrence of a chargeable event.
21.Paragraph 9 modifies the rules for EIS relief following the change to the way in which entrepreneurs’ relief is given. In future an individual may choose between claiming entrepreneurs’ relief and paying tax on the gain at 10 per cent, or deferring the gain under the EIS rules and paying tax at 18 per cent or 28 per cent when it later comes into charge. Where a gain exceeds the £5 million lifetime limit for entrepreneurs’ relief it will be possible to claim entrepreneurs’ relief on the gain up to the limit and to defer the gain above the limit under the EIS rules. This change has effect where the gain arises on a disposal on or after 23 June 2010 (paragraph 14).