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Taper relief and indexation relief on CGT

Q: I was out of the country at the time of the Pre-Budget Report. I subsequently tried to get full details of the proposed changes to capital gains tax (CGT) but found it difficult to get a consistent story, and then there were subsequent alterations to the proposals in the Budget itself.
Most of the comment concerning these changes has been regarding their effect on business assets, but I am interested in non-business assets and I think most of your readers would be too.
I have seen some reference to indexation being discontinued for equities held before April 1988. Is this correct?
The proposal to end taper relief also penalises those who have held equities for the long term. The loss of the reduction of the gain by up to 40 per cent is not compensated by the single flat rate of 18 per cent for CGT and, taken together with the indexation change, makes it more difficult to stay within the tax-free allowance.
Can you please clarify the position or point me in the direction where I can find definitive answers?

D. Ringshaw, via email

A: The new proposals have been altered to accommodate sellers of small businesses being hit hardest by the changes. However, non-business assets could be hit hard by the changes that came into force on 6 April.

The proposal that was originally made, and which has been stuck to, has seen both taper relief and indexation relief abolished in respect of all disposals made on or after 6 April 2008. Furthermore, the previous sliding scale of CGT has now been replaced with a single rate of 18 per cent, effective from the same date. These changes apply irrespective of when the asset was purchased.

The loss of indexation relief is potentially the most serious change for long-term investors. Under the old system, anyone disposing of assets acquired prior to 31 March 1998, could increase the acquisition cost of the asset, by the increase in the RPI between the later of the date of acquisition and March 1982 and 31 March 1998. For assets held in March 1982, this relief was worth 104 per cent of the acquisition cost.

The abolition of taper relief has caused similar, but much less extreme, problems with any investor who was eligible for indexation relief also being eligible for taper relief.

Taper relief, on investment assets, produced effective tax liabilities of between 20 and 12 per cent for basic rate taxpayers and between 40 and 24 per cent for higher rate taxpayers, depending on the term for which the asset has been held.

So, therefore, whether you have benefited or been penalised by the changes in the tax rules will very much depend on how long you have held a particular investment and whether you are a basic rate or a higher rate taxpayer.

Answer by Jonathan Davis