details of the clause - the national...

HM REVENUE AND CUSTOMS FINANCE BILL 2008

RESOLUTION 2 CLAUSE 1

1

EXPLANATORY NOTE

CLAUSE 1: INCOME TAX: CHARGE AND MAIN RATES

FOR 2008-09

SUMMARY

1. Clause 1 imposes the income tax charge for 2008-09 and

sets the basic and higher rates of income tax at 20 per cent

and 40 per cent, respectively.

DETAILS OF THE CLAUSE

2. Subsection (1) imposes the income tax charge for 2008-09.

3. Subsection (2)(a) sets the basic rate of income tax at 20 per

cent.

4. Subsection (2)(b) sets the higher rate of income tax at 40

per cent.

BACKGROUND NOTE

5 . Income tax is an annual tax re-imposed each year by

Parliament (even if the proposed rates are the same as for

the previous year). The table below sets out the rates and

income bands for 2007-08 and the proposed rates and

income bands for 2008-09:



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2007-08 2008-09

Starting rate 0 - 2,230 at 10% Not applicable

Basic rate 2,231 - 34,600 at

22%

0 - 36,000 at 20%

Higher rate Over 34,600 at 40% Over 36,000 at 40%

6 . The amounts of personal allowance, higher personal

allowances for those over 65, married couples allowance,

blind persons allowance, and the associated minimum

amount and adjusted net income limit are set by order in

an amount increased by indexation over the amount for the

preceding year. The indexation orders for 2008/09 were

made before 5 April 2008. Clause 2 provides that the

higher levels of personal allowance for individuals aged 65

to 74 and those aged 75 and over for 2008/09 should be

increased by 1,180 above the indexed amounts of 7850

and 8000 to 9030 and 9180 respectively

7. For 2008-09, it is proposed that the ten per cent savings

rate will be removed and non-savings income (broadly

earnings, pensions, taxable social security benefits, self-

employed trading profits and income from property) and

savings income (broadly bank and building society

interest) will be taxed at the basic rate. Clause 2 provides

for a new ten per cent starting rate for savings and starting

rate limit for savings. No changes are proposed to the



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taxation of dividends which are taxed at ten per cent up to

the basic rate limit and at 32.5 per cent above that limit.

8. Up to 5 April 2008, capital gains will be chargeable at

rates equivalent to the rates of income tax that would apply

if the gains were treated as the top slice of income. The

charge remains capital gains tax and is assessed separately

from income. From 6 April 2008 capital gains are

chargeable at a single rate of capital gains tax of eighteen

per cent.



1

EXPLANATORY NOTE

CLAUSE 2: INCOME TAX: PERSONAL ALLOWANCES

FOR THOSE AGED 65 AND OVER

SUMMARY

1. Clause 2 sets the personal allowances for income tax for

2008-09 for individuals aged 65 to 74 at 9,030, and for

those aged 75 and over at 9,180.


2 . Subsection (1)(a) replaces the amounts currently in

subsection 36(1) Income Tax Act 2007 (ITA) and

subsection 257(2) Income and Corporation Taxes Act 1988

(ICTA) with 9,030.

3. Subsection (1)(b) replaces the amounts in section 37 of

ITA and subsection 257(3) of ICTA with 9,180.

4. Subsection (2) disapplies section 57 of ITA, and section

257C of ICTA in so far as they apply to the provisions in

subsection 1 of this clause.

BACKGROUND NOTE

5. Individuals are entitled to a personal allowance for income

tax. Individuals aged 65 to 74 and aged 75 and over in a



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tax year are entitled to higher amounts of personal

allowances the age-related allowances.

6. The provisions in ITA and ICTA which provide personal

allowances include that the higher amounts for individuals

aged 65 to 74 and those aged 75 and over are increased by

indexation annually. The provisions also include that

before the start of the tax year, HM Treasury will replace

the amounts specified in both Acts with the increased

amount specified by order.

7. The table below sets out the amounts of personal allowance

for 2007-08, the amounts specified by order for 2008-09

and the amounts specified by this clause for 2008-09:

Individual aged 2007-08 by

order

2008-09 by

order

2008-09 by

this clause

65 to 74 7,550 7,850 9,030

75 and over 7,690 8,000 9,180

8 . The effect of this clause is to override the amounts

specified by order for the allowances for individuals aged

65 to 74 and those aged 75 and over to set them at an

amount 1,180 greater than the indexed increases.



SCHEDULE 1

1

EXPLANATORY NOTE

CLAUSE 3 AND SCHEDULE 1: INCOME TAX: ABOLITION

OF THE STARTING AND SAVINGS RATES AND

CREATION OF STARTING RATE FOR SAVINGS

SUMMARY

1. Clause 3 and Schedule 1 abolish the 10 per cent starting

rate of income tax and the 20 per cent savings rate of

income tax and introduce a new 10 per cent starting rate

for savings. They also rename the rate of relief applicable

to the Enterprise Investment Scheme (EIS). The Schedule

includes the consequential amendments to legislation

affected by the changes introduced by this clause and

Schedule.


2 . Clause 3 provides for the removal of the 10 per cent

starting rate of income tax, the removal of the 20 per cent

savings rate of income tax and a schedule which introduces

a new 10 per cent starting rate for savings, renames the rate

of relief applicable to the Enterprise Investment Scheme

(the EIS rate) and includes the consequential

amendments pursuant to the changes introduced by this

clause.



SCHEDULE 1

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3. Subsection (1) of the clause provides that section 6 of the

Income Tax Act 2007 (ITA) is amended. Section 6 of the

Act sets out the main rates at which income tax is charged.

4 . Subsection (2) omits section 6(1)(a) of ITA, which

provides that the starting rate is one of the main rates of

income tax.

5. Subsection (3) omits starting rate from section 6(2) of

ITA. This means that the basic rate and the higher rate are

the main rates of income tax.

6. Subsection (4) provides that the reference to starting rate

is substituted by a reference to starting rate for savings in

section 6(3) of ITA, which sets the other rates of income

tax.

7. Subsection (5) provides that starting rate is omitted from

the heading of section 6 of ITA.

8. Subsection (6) provides that the amendments in the clause

apply for the tax year 2008-09 and subsequent tax years.

9. Subsection (7) introduces Schedule 1 which contains the

provisions to abolish the starting rate and savings rate and

to create a starting rate for savings. The Schedule also

contains the consequential amendments including the

renaming of the rate of relief applicable to the EIS to the

EIS rate.

DETAILS OF THE SCHEDULE



SCHEDULE 1

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10. Paragraphs 1 to 12 amend ITA and provide for the removal

of the starting rate; the introduction of a new starting rate

for savings including rules that the limit is increased each

year by indexation; re-order the section which includes the

monetary amounts of the basic rate; consequential

amendments.

11. Paragraph 1 introduces the amendments to ITA.

12. Paragraph 2 removes the current savings rate at section 7 of

ITA (the savings rate) and replaces it with a new starting

rate for savings of 10 per cent.

13. Paragraph 3(1) provides that section 10 of ITA (income

charged at the starting, basic and higher rates: individuals)

is amended.

14. Paragraph 3(2) omits section 10(1) of ITA which provides

that the first slice of an individuals income is charged at

the starting rate.

15. Paragraph 3(3) substitutes a new section 10(2) in ITA to

confirm that the first slice of an individuals income is

charged at the basic rate, unless it is alternatively charged

by section 12 at the new starting rate for savings.

16. Paragraph 3(4) omits a reference to section 12 of ITA

(income charged at the savings rate) in section 10(4) of the

Act.



SCHEDULE 1

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17. Paragraph 3(5) replaces the existing subsection (5) and

inserts new subsections (6) and (7) into section 10. New

subsections (5) and (6) replace sections 20(2) and 20(3).

Subsection (5) is the monetary amount of the basic rate

limit. New subsection (6) refers to two specific provisions

that enable the basic rate limit to be increased. New

section 10(7) is a signpost to the provisions to increase the

basic rate limit by indexation. The new subsections bring

together in a single section all the provisions that affect the

basic rate limit.

18. Paragraph 3(6) omits the word starting from the heading

of section 10.

19. Paragraph 4 omits the reference to the savings rate in

section 11(2) of the Act (income charged at the basic rate:

other persons).

20. Paragraph 5 substitutes a new section 12 (income charged

at the starting rate for savings) for the existing section 12

(income charged at the savings rate). New section 12

provides a new starting rate for savings.

21. New section 12(1) provides that income tax is charged at

the starting rate for savings (rather than the basic rate) on

an individuals income up to the starting rate limit for

savings as is savings income. Taken with new section

10(2) of ITA (introduced by paragraph 3(3) of the

Schedule), the starting rate limit for savings (2,320 for



SCHEDULE 1

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2008-09) creates an alternative tax band; it is not in

addition to the basic rate limit (36,000 for 2008-09).

22. New section 12(2) provides that section 12(1) is subject to

other rules in the Income Taxes Acts which provide for

different rates of tax in certain circumstances. An example

is dividend income which is taxed at the dividend ordinary

rate.

23. New section 12(3) sets the starting rate limit for savings for

2008-09 at 2,320.

24. New section 12(4) signposts the provisions which provide

for indexation of the starting rate limit for savings in

section 21 of ITA (indexation of the starting rate limit and

the basic rate limit) as amended by paragraph 10 of the

Schedule.

25. New section 12(5) provides that section 16 of ITA (savings

and dividend income to be treated as highest part of total

income) determines the extent to which an individuals

income is savings income for the purposes of the new

starting rate limit for savings. This section confirms that

the current statutory ordering of types of income for the

purposes of charging income tax will apply to the starting

rate for savings.

26. Paragraph 6 omits the references to the existing starting

rate in sections 13(1)(b) and 13(4) of ITA (income

charged at the dividend ordinary and dividend upper rates:



SCHEDULE 1

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individuals). These amendments are consequences of the

removal of the starting rate.

27 . Paragraph 7 amends section 16 of ITA (savings and

dividend income to be treated as highest part of total

income) as a consequence of the introduction of the starting

rate for savings. New section 16(1)(a) has effect for

determining the extent to which income up to the starting

rate limit for savings consists of savings income. New

section 16(1)(b) retains the effect of section 13 of ITA

(income charged at the dividend ordinary rate and dividend

upper rates: individuals) for dividend income.

28. Paragraph 8 amends section 17 of ITA (repayment: tax

paid at basic rate instead of starting or savings rate) to

substitute references to starting rate or savings rate with

starting rate for savings. The amendments in paragraph

8 allow a repayment claim outside self assessment if a

person has suffered tax at the basic rate on income received

and the person is liable at the starting rate for savings.

29. Paragraph 9 amends the sub-heading before section 20 of

ITA (starting rate limit and basic rate limit). Section 20 of

ITA is omitted by paragraph 10 so the heading refers to the

contents of section 21.

30. Paragraph 10 omits section 20 of ITA (the starting rate

limit and the basic rate limit). Section 20(1) currently

states the monetary amount of the starting rate limit which



SCHEDULE 1

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is being abolished. Paragraph 3(5) brings the other

provisions together in section 10.

31. Paragraph 11 amends section 21 of ITA (indexation of the

starting rate limit and the basic rate limit) which currently

provides for indexation of the starting rate and basic rate

limits. It removes the provisions which index the starting

rate limit and introduces the provisions to index the starting

rate limit for savings.

32. Paragraph 11(2) omits section 21(2) of ITA which is the

provision which indexes the starting rate limit.

33. Paragraph 11(3) inserts a new subsection (3A) into section

21 of ITA, providing the rules for the indexation of the

starting rate limit for savings. The provisions for the

indexation of the starting rate limit for savings mirror the

existing rules for the indexation of the starting rate limit,

thereby retaining the long-standing indexation principle for

income tax rates and allowances.

34. Paragraph 11(4) inserts a reference to new section 21(3A)

in section 21(4) of ITA. Section 21(4) explains that the

new rate limits for a tax year need not be taken into

account for the purposes of PAYE until after 17 May in the

year.

3 5 . Paragraph 11(5) inserts into section 21(5) of ITA

references to reflect the new provisions in sections 10 and

12 (provided respectively by paragraphs 3 and 4 of the



SCHEDULE 1

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Schedule) and new section 21(3A) (provided by sub-

paragraph 10(3)) and substitutes references to starting rate

limit with starting rate limit for savings. Section 21(5)

requires HM Treasury to make an order setting the new

rate limits before the start of the tax year.

36. Paragraph 11(6) changes the heading of section 21 of ITA

(indexation of the starting rate limit and basic rate limit) to

indexation of the basic rate limit and starting rate limit for

savings.

37 . Paragraph 12 omits the reference to savings rate in

section 31(2) of ITA (total income: supplementary). From

2008-09, there will be no savings rate so tax can only be

deducted at the basic rate of 20 per cent.

38. Paragraphs 13 to 19 provide the consequential amendments

to the EIS on the removal of the starting rate. The EIS

provides tax relief to individuals who subscribe for shares

in an EIS qualifying company. The relief available is at

the existing savings rate for the current year of the cost of

the shares, to be set against the individuals income tax

liability for the tax year in which the investment was made.

The Schedule provides that the EIS rate is set at 20 per

cent, the same rate as the existing savings rate.

39 . Paragraph 13 amends section 158 of ITA (form and

amount of EIS relief) which quantifies the amount of the

income tax reduction to which an individual is entitled if

the individual claims EIS relief for a tax year.



SCHEDULE 1

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40. Paragraph 13(2) substitutes the reference to savings rate

with a reference to EIS rate in section 158(2) of ITA

which currently provides that amount of an individuals tax

reduction is calculated by reference to the savings rate.

41. Paragraph 13(3) introduces a new subsection (2A) into

section 158 of ITA (form and amount of EIS relief) which

sets the EIS rate at 20 per cent. Taken together, the

changes in paragraph 12(2) and (3) provide that EIS relief

available is at the new EIS rate and that the rate is 20 per

cent.

42. Paragraphs 14 to 19 make amendments consequential to the

removal of the starting rate and the introduction of the new

EIS rate by substituting savings rate with EIS rate in

the EIS provisions.

43. Paragraphs 20 to 64 make amendments to the Taxes Acts

consequential to:

the removal of the savings rate;

the introduction of the starting rate for savings; and

the omission of the basic rate limit from section 20 of ITA

and the insertion of the basic rate limit into section 10 of

ITA.

44. Paragraph 65 provides that apart from those made by

paragraph 11, the amendments made by the Schedule have

effect for the tax year 2008-09.



SCHEDULE 1

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BACKGROUND NOTE

45. For 2007-08, there are three main rates of tax: the starting

rate, basic rate and the higher rate. The effect of this

clause and Schedule is to reduce the three main rates of

income tax to two: the basic rate and the higher rate.

Separately clause 1 sets the basic rate of tax at 20 per cent

and the higher rate of tax at 40 per cent. This clause and

Schedule also introduce a new 10 per cent starting rate for

savings.

46. For 2008-09, the basic rate of tax will be 20 per cent, the

same rate as the existing savings rate. This alignment of

rates provides the opportunity to simplify the structure of

income tax by merging the savings rate into the basic rate.

The benefit is that the general rule will be that an

individuals income will be taxable at the basic and higher

rates. There will continue to be exceptions, for example

there are no changes to the rates of tax which apply to

dividends.

47. This clause and Schedule also introduce a new starting rate

for savings - a 10 per cent rate that applies to savings

income only. Under the existing structure, savings income

is taxed at the 10 per cent starting rate only to the extent

that the starting rate band is not exhausted by non-savings

income, and the new structure maintains that treatment for

savings income. This means that the 10 per cent rate,

which will only apply to savings income, will have effect



SCHEDULE 1

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only where the band is not exhausted by non-savings

income.

48. The starting rate limit for savings for 2008-09 is set at

2,320 and the limit is subject to indexation for later years.

This new rate will be available in the following

circumstances. Section 16 of ITA provides ordering rules

which, subject to section 1012 of ITA providing further

rules where other income is also identified as the highest

part of the individuals total income, requires savings

income (broadly bank and building society interest) and

dividend income to be treated as the highest part of an

individuals total income. And of these two types of

income, dividend income is taken as the highest part. The

effect of these rules is that an individuals income from

non-savings sources (broadly earned income, pensions,

taxable social security benefits, profits from self-

employment and income from property) are taxed first

followed by savings income and finally dividend income.

49. The changes made by this clause and supporting Schedule

preserve the order in which income is charged to tax.

Should an individuals non-savings income exceed the new

starting rate for savings limit, then the starting rate for

savings will not be available for the savings income. The

individuals savings income will be charged to tax at the 20

per cent basic rate. However, should an individuals non-

savings income after personal allowances be less than the

starting rate for savings limit, then the savings income will



SCHEDULE 1

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be taxable at the 10 per cent starting rate for savings up to

the balance of the limit.

50. The removal of the savings rate provides the opportunity to

rename the rate applicable to the EIS scheme the EIS

rate. The EIS provides tax relief to individuals who

subscribe for shares in an EIS qualifying company at the

savings rate for the year in which the subscription is made.

The EIS rate of 20 per cent takes the place of the savings

rate for the EIS.



1

EXPLANATORY NOTE

CLAUSE 4: CORPORATION TAX: CHARGE AND MAIN

RATES FOR FINANCIAL YEAR 2009

SUMMARY

1. Clause 4 charges corporation tax for the financial year

beginning 1 April 2009 and sets the rate of corporation tax

at 30 per cent on ring fence profits of North Sea oil

companies and 28 per cent on all other profits of

companies.


2 . Subsection (2) sets the charge and main rates of

corporation tax for the financial year 2009. Subsection

(2)(a) sets the main rate of corporation tax at 28 per cent.

Subsection (2)(b) sets the main rate of corporation tax for

ring fence profits at 30 per cent.

3. Subsection (3) defines the meaning of ring fence profits

for the purposes of these clauses as that which is used in

Chapter 5 of Part 12 of the Income and Corporation Taxes

Act 1988.



2

BACKGROUND NOTE

4. The main rate of corporation tax is paid by companies with

profits of more than 1,500,000 (the upper profits limit).

5. Where two or more companies are associated with one

another, the profits limit is reduced. This is done by

dividing the limit by the number of associated companies.

6. Companies with profits from oil extraction and oil rights

in the UK and the UK Continental Shelf (ring fence

profits) will maintain the main rate of corporation tax

applicable to ring fenced profits activities of North Sea

companies. Those activities which are not ring fenced will

continue to be charged at the main rate of corporation tax.



1

EXPLANATORY NOTE

CLAUSE 5: CORPORATION TAX: SMALL COMPANIES'

RATES AND FRACTIONS FOR FINANCIAL YEAR 2008

ETC

SUMMARY

1. Clause 5 sets the small companies rate of corporation tax

for the financial year beginning 1 April 2008 at 21 per

cent for all profits apart from ring fence profits of North

Sea oil companies and 19 per cent for ring fence profits.

Additionally, it sets the fraction used in calculating

marginal small companies relief from the main rate at

7/400 for all profits apart from ring fence profits and

11/400 for ring fence profits.


2 . Subsection (1) sets the small companies rate of

corporation tax for the financial year 2008. Subsection

(1)(a) sets the small companies rate of corporation tax at

21 per cent on profits of companies other than ring fence

profits. Subsection (1)(b) sets the small companies rate of

corporation tax at 19 per cent on ring fence profits.

3. Subsection (2) sets the fractions used to calculate marginal

small companies relief. Subsection (2)(a) sets the



2

standard fraction as 7/400 and subsection (2)(b) sets the

ring fence fraction for ring fence profits at 11/400.

4. Subsection (3) provides that where a company makes a

claim for marginal small companies relief in respect of an

accounting period, part of which falls in the financial year

2008, or any subsequent financial year and its profits for

that accounting period consist of both ring fence and other

profits, then its claim to marginal small companies relief

under section 13(2) of ICTA is modified appropriately.

The conditions for this modification are laid out in

subsections (3) to (7) of Finance Act 2007

5. Subsection (4) defines the meaning of ring fence profits

for the purposes of these clauses as that which is used in

Chapter 5 of Part 12 of ICTA.

BACKGROUND NOTE

6. Companies with profits up to 300,000 pay corporation tax

at the small companies rate.

7. The small companies rate of corporation tax for the 2008

financial year will be 19 per cent for North Sea ring fence

profits and 21 per cent for all other profits.

8. Companies with profits between 300,000 and 1,500,000

(the lower and upper limits) benefit from small companies

marginal relief from the main rate.



3

9. Marginal relief has the effect of gradually increasing the

rate of tax for a company as its profits move from the

lower to the upper profits limit. The fraction used in

calculating the marginal relief will change to 7/400 for all

profits other than ring fence profits and remain at 11/400

for ring fence profits.

10. The example below illustrates the effect of marginal relief

for a company with taxable non-ring fence profits of

500,000. Its tax liability is calculated as follows:

500,000 @ 28 per cent 140,000

minus 7/400 of 1,000,000* 17,500

Tax payable: 122,500

* 1,000,000 is the difference between the upper limit and

the profit.

11. The example below illustrates the effect of marginal relief

for a company with taxable ring fence profits of 500,000.

It tax liability is calculated as follows:

500,000 @ 30 per cent 150,000

minus 11/400 of 1,000,000* 27,500

Tax payable: 122,500

* 1,000,000 is the difference between the upper limit and

the profit.



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12. Where two or more companies are associated with one

another, the profits limits are divided by the number of

associated companies.



SCHEDULE 2

1

EXPLANATORY NOTE

CLAUSE 6 AND SCHEDULE 2: CAPITAL GAINS TAX:

RATE ETC

SUMMARY

1. Clause 6 and Schedule 2:

introduce a single rate of capital gains tax (CGT) of

18 per cent;

abolish taper relief, indexation allowance (currently

frozen at April 1998), and halving relief;

make rebasing of cost to 31 March 1982 compulsory

(for assets held at that date); and

simplify the rules for matching certain assets (mostly

shares) disposed of with assets acquired.

The changes have effect only for the purposes of CGT.

They do not apply to corporation tax in respect of capital

gains.


2. Subsection (1) replaces section 4 of the Taxation of

Chargeable Gains Act 1992 (TCGA). The effect of the

change is to charge CGT at a single rate of 18 per cent,



SCHEDULE 2

2

replacing the current rules that charge CGT at income tax

rates as though the gains were additional income.

3. Subsection (2) provides for the Schedule to have effect.

4. Subsection (3) is the commencement provision. The new

single rate of CGT applies for the year 2008-09 and later

years. The Schedule contains commencement provisions

for the changes that it makes; in broad terms, the changes

all apply for the year 2008-09 and later years.


5. Paragraphs 1 to 23 make changes consequential upon the

change of CGT rates made by the clause. The removal of

the link to income tax rates and bands means that various

rules providing for the interaction of income tax and CGT

rules are no longer required. This part of the Schedule

also:

repeals some of the special rules for UK resident

settlor-interested settlements (because the single rate

of CGT means that those rules are no longer

required); and

amends certain of the special rules for the taxation of

the income and gains of settlements for vulnerable

persons to take account of the separation of the CGT

rate from the income tax rates, and of the repeal

mentioned in the preceding bullet. The special rules



SCHEDULE 2

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continue to provide a beneficial regime for

settlements for vulnerable persons.

6. Paragraph 1 provides for TCGA to be amended.

7. Paragraph 2 amends section 2, consequential upon the

repeal of section 77 made by paragraph 5 of the Schedule

(see paragraph 9 below).

8. The changes made by paragraphs 3 and 4 are minor

changes to remove references to the interaction of the

income tax and CGT rates in relation to gains relating to

adjustments to income tax liability arising from

transactions involving life insurance policies and to gains

treated as chargeable on shareholders in certain companies

resident outside the UK.

9. Paragraph 5 repeals sections 77 to 79. These provisions

have the effect that gains in respect of which the trustees of

a UK resident settlor-interested settlement would otherwise

have been chargeable to CGT are in certain circumstances

charged on the settlor. The introduction of a single rate of

CGT for trustees and individuals means that the application

of sections 77 to 79 would have no effect on the rate at

which the gains were charged to CGT. The sections will

serve no useful purpose in future, and are accordingly

repealed.



SCHEDULE 2

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10. Paragraphs 6 and 8 to 10 make minor amendments to

remove from other provisions of the TCGA references to

some or all of sections 77 to 79.

11. Paragraph 7 amends provisions of Schedule 4A TCGA to

replace references to the repealed sections 77 to 79 with

references to other provisions of the TCGA. The

substituted provisions have the same effect as the parts of

sections 77 to 79 that they replace, so that there is no

change to the operation of Schedule 4A.

12. Paragraphs 11 to 20 amend the rules in Chapter 4 of Part 2

of the Finance Act (FA) 2005 for the taxation of the

income and gains of settlements for vulnerable persons.

The broad effect of these rules is that the tax paid in

respect of such income and gains should be no higher than

would be the case if the income and gains arose directly to

the vulnerable person. A vulnerable person is, in broad

terms, a person suffering from a significant mental or

physical disability, or a minor child who has lost a parent

through death.

13. For most cases, the rules in FA 2005 result in the trustees

liability to income tax or CGT being reduced by sums

computed in accordance with particular formulae. But

where capital gains arose to trustees and the vulnerable

beneficiary was resident in the UK, the rules used sections

77 to 79 TCGA to charge gains directly on the vulnerable

person.



SCHEDULE 2

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14. Paragraph 11 provides for Chapter 4 of Part 2 of FA 2005

to be amended, and paragraphs 12 and 19 make minor

amendments that result from the fact that the changes to

that Chapter mean that section 33 is removed by paragraph

18 of the Schedule (see paragraph 18 below).

15. Paragraphs 13 and 14 amend the rules for computing the

amount by which the trustees income tax liability is

reduced. These changes are needed because the rules

previously had to take account of the link between income

tax rates and bands and the rates at which CGT was

chargeable. With the removal of this link, the rules for

calculating the income tax deduction no longer need to

take account of CGT liability, and the changes remove the

references to CGT.

16. Paragraphs 15 to 18 amend the rules for the special

treatment of chargeable gains of trustees of a settlement for

a vulnerable person. Paragraph 16 removes references to

section 77 of TCGA that prevent overlap between the

operation of section 77 by virtue of its own rules, and

again by virtue of its deemed application under section 31

of FA 2005.

17. The result of the changes to section 31 of FA 2005 made

by paragraph 16 of the Schedule is that where the

vulnerable person is resident in the UK, the trustees

liability to CGT in respect of chargeable gains on the

disposal of settled property held for the benefit of the



SCHEDULE 2

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vulnerable person (described as qualifying trust gains) is

reduced to the amount of CGT that would have been

payable by the vulnerable person in respect of those gains

if they had arisen directly to the vulnerable person. This

replaces the previous rule, which used section 77 of TCGA

so that the vulnerable person was charged to CGT as

though the qualifying trust gains arose directly to him.

18. Where the vulnerable person is not resident in the UK, the

same principle applies, that the trustees CGT liability in

respect of qualifying trust gains is reduced to the amount

that would have been payable had they arisen directly to

the vulnerable person. This rule already applied in these

cases, but the removal of the link between the CGT and

income tax rates means that the calculation process can be

simplified, as only CGT liability needs to be taken into

account. This means that rules previously in sections 32

and 33 will in future be within a single section, and

accordingly paragraph 17 of the Schedule amends section

32 of FA 2005 to provide this simplified basis of

calculation of the adjustment, while paragraph 18 removes

section 33 from FA 2005.

19. Paragraph 20 makes consequential amendments to

Schedule 1 to FA 2005, which supplements Chapter 4 of

Part 2 of that Act. The amendments remove certain

definitions that are no longer required, because of the

simplification of the rules.



SCHEDULE 2

7

20. Paragraph 21 repeals provisions in various Finance Acts.

These provisions introduced amendments to the TCGA or

to FA 2005 which are now being removed by some of the

provisions in the Clause and paragraphs 1 to 20 of the

Schedule. Following the abolition of those provisions, the

Finance Act provisions that introduced them serve no

further purpose and are accordingly repealed.

21. Paragraph 22 is the commencement provision. The

amendments made by paragraphs 1 to 21 have effect for

the tax year 2008-09 onwards.

Abolition of taper relief

22. Paragraphs 23 to 56 provide for the abolition of taper

relief and consequential amendments. Taper relief has the

effect of reducing the effective rate at which CGT is paid.

It operates by reducing the amount of a gain which is

charged to CGT, the amount of the reduction being

determined by reference to whether the asset on whose

disposal the gain arises was a business or a non-

business asset, and the length of time that the asset had

been owned before the disposal.

23. Paragraph 23 provides for the TCGA to be amended.

24. Paragraph 24 amends section 2 of TCGA, which describes

how CGT is charged, to remove references to taper relief.



SCHEDULE 2

8

25. Paragraph 25 removes section 2A of TCGA (which

provides for taper relief to be given in computing gains

chargeable to CGT), so abolishing taper relief.

26. Paragraphs 26 to 32, 35, 37, and 39 to 50 make minor

changes consequential upon the abolition of taper relief.

These paragraphs remove references to taper relief from

various provisions of the TCGA. In particular, paragraph

47 removes Schedule A1, which provided detailed rules

for taper relief. Many of the minor changes made by these

paragraphs reverse amendments that were made when taper

relief was introduced, and restore the previous wording.

27. Paragraph 33 amends section 165(8)(aa) of TCGA.

Previously, section 165(8)(aa) provided that the terms

holding company, trading company, and trading

group used elsewhere in section 165 were to have the

meanings given by certain paragraphs of Schedule A1 to

TCGA. Following the removal of Schedule A1 from

TCGA (see paragraph 45 of the Schedule and paragraph 28

of this note), these definitions need to be inserted

elsewhere in TCGA, and the revised subsection (8) of

section 165 provides that the meaning of the three terms is

given by section 165A of TCGA.

28. Paragraph 34 inserts the new section 165A into the TCGA.

This section provides definitions of the terms holding

company, trading company and trading group for the

purposes of section 165 of TCGA. The definitions



SCHEDULE 2

9

reproduce, without any changes of effect, the definitions

found respectively in paragraphs 22(1), 22A and 22B of

Schedule A1 to TCGA, before the removal of that

Schedule as part of the abolition of taper relief

29. Paragraphs 36 and 38, which serve a purpose similar to

that of paragraph 34 in relation to section 165(8)(aa),

replace references elsewhere in the TCGA to paragraph 22

of Schedule A1 with references to section 165A.

30. Paragraph 51 replaces a reference in FA 2002 to the

definitions of holding company and trading company

in Schedule A1 to TCGA with a reference to the

definitions in the new section 165A of TCGA.

31. Paragraphs 52 to 54 make minor amendments to remove

references to taper relief from other legislation.

32. Paragraph 55 is similar in nature to paragraph 21,

removing provisions in other Acts that introduced

amendments to the TCGA that have now been removed

from that Act.

33. Paragraph 56 is the commencement provision for the

changes made by paragraphs 24 to 58. The changes made

by paragraph 31(2) and (3) (which relate to the interaction

of certain rules relating to non-UK resident trusts and

provisions relating to periods of temporary absence from

the UK) have effect where an intervening year for the

purposes of section 10A of TCGA (broadly a year of



SCHEDULE 2

10

assessment throughout the whole of which an individual is

temporarily not resident in the UK for tax purposes) is the

year 2008-09 or later. The changes made by paragraphs

41 and 43, which relate to rules allowing certain losses to

be treated as arising in an earlier year than is actually the

case, have effect where that earlier year is the tax year

2008-09 or a later year. The rest of the changes have

effect in relation to chargeable gains that arise, or are

treated as arising, in the year 2008-09 and subsequent

years.

Abolition of the kink test (compulsory rebasing to 31 March

1982)

34. Paragraphs 57 to 71 provide for the abolition of the kink

test for CGT purposes. The kink test is part of the rules

relating to disposals of assets that had been held at 31

March 1982.

35. In broad terms, the rules for rebasing and the kink test

apply as follows. Assets held at 31 March 1982 are treated

as though they had been acquired at their market value on

that date, so that gains or losses relating to changes in

value prior to that date are not taken into account for CGT

purposes. However, the kink test allows for a comparison

of the figure of gain or loss based on the market value on

31 March 1982 with the gain or loss based on the actual

cost before 31 March 1982. The lower of the two gains is

chargeable to tax (or the lower of the two losses is



SCHEDULE 2

11

allowable). (If there is a gain on one basis of calculation

and a loss on the other, the rule is that there is neither a

chargeable gain nor an allowable loss.)

36. A person may, subject to certain conditions, elect that all

their gains (except for those on a few specified types of

asset) should be computed as though the assets had been

acquired on 31 March 1982 for their market value at that

time, thus dispensing with the need for the kink test.

37. The abolition of the kink test for CGT purposes means that

in future the gains accruing on all disposals of assets

owned at 31 March 1982 will be based on their market

value at that date, so effectively rebasing all allowable

expenditure to 31 March 1982. This will apply even to

those few categories of asset previously excluded from an

election for such rebasing.


39. Paragraph 58 amends section 35 of TCGA. The primary

effect of the changes is that the kink test ceases to apply

for CGT purposes. This is achieved by sub-paragraph (3),

which inserts a new subsection (2A) in section 35. This

new subsection provides that subsections (3) to (8) of

section 35 (which include the kink test at subsections (3)

and (4), and the provision allowing an election to rebase

all assets to 31 March 1982 at subsections (5) to (8)) are to

apply only for the purposes of corporation tax. Similarly,

sub-paragraph (9) amends subsection (9) of section 35 to



SCHEDULE 2

12

provide that Schedule 2 to TCGA, which relates to assets

held at 6 April 1965, is to apply only for the purposes of

corporation tax.

40. The result of this restriction of the application of those

subsections is that the only parts of section 35 that apply

for CGT purposes are:

subsections (1) and (2), which provide for the gain

accruing on the disposal of an asset that was held on

31 March 1982 to be computed on the basis that the

asset was acquired on 31 March 1982 for

consideration equal to its market value at that time;

and

subsection (10), which provides for Schedule 3 to

have effect; Schedule 3 contains provisions that

supplement section 35.

41. Sub-paragraphs (2) and (5) to (8) of paragraph 58 make

minor changes to section 35 to reflect the fact that the

various subsections will apply only to companies, and that

an election for all assets to be rebased to 31 March 1982

can in future be made only for corporation tax purposes.

42. Sub-paragraph (4) of paragraph 58 amends section

35(3)(d). That section contains a list of provisions that

require certain disposals of assets to be treated for TCGA

purposes as being for an amount of consideration that will

ensure that neither a gain nor a loss arises to the person



SCHEDULE 2

13

making the disposal. This list is replaced by a reference to

the no gain/no loss provisions, which are now listed in

the new subsection (3A) to section 288 (see paragraph 43

below). Several other TCGA provisions (relating to both

CGT and corporation tax in respect of chargeable gains)

which refer to the list of no gain/no loss provisions in

section 35(3)(d) will in future refer instead to section

288(3A) (see paragraph 47 below).

43. Paragraph 58 inserts a new subsection (3A) into section

288, which provides definitions of various terms for the

purposes of the TCGA. This new subsection defines the

new term no gain/no loss provisions by reproducing the

list from section 35(3)(d) (see paragraph 42 of this note),

but omitting certain provisions in that list that cannot apply

to disposals on or after 6 April 2008.

44. Paragraph 59 introduces a new section 35A into the

TCGA. This section applies where there is a disposal of an

asset on or after 6 April 2008 and:

the person disposing of the asset at that time acquired

the asset between 31 April 1982 and 5 April 2008 by

way of a transfer (the relevant disposal) in relation

to which a no gain/no loss provision had effect; and

any other disposal and acquisition of the asset between

31 March 1982 and 5 April 2008 was also one to

which a no gain/no loss provision applied; and



SCHEDULE 2

14

rebasing under section 35(2) did not apply to the

relevant disposal (because the person who held the

asset at 31 March 1982 had not made an election (see

paragraph 36 above) to rebase all his assets to their

value at that date).

45. Where these conditions are met, the new section 35A

ensures that, in computing the gain or loss on the disposal

on or after 6 April 2008, the allowable expenditure

includes the value of the asset at 31 March 1982 and the

indexation allowance due for the period from 31 March

1982 to the date on which the person making the post 6

April 2008 disposal acquired the asset.

46. The rule will also apply if the disposal on or after 6 April

2008 is governed by a no gain / no loss provision; in that

case the disposal consideration to give effect to the no gain

/ no loss provision will take account of the value of the

asset at 31 March 1982 and indexation allowance due for

the period from 31 March 1982 up to the time of

acquisition by the person making the post 6 April 2008

disposal.

47. Paragraphs 60 to 62, and 64 to 69 make consequential

changes that:

replace various references in the TCGA and in FA

1997 to the list of provisions in section 35(3)(d) with

references to no gain / no loss provisions;



SCHEDULE 2

15

replace a reference to assets held at 6 April 1965 with

a reference to assets held at 31 March 1982;

amend provisions in Schedules 2 and 3 that will in

future apply only for corporation tax purposes to

remove references to matters that can be relevant only

for CGT purposes (such as transactions between

spouses or civil partners); and

remove a reference in Schedule 4ZA to TCGA (which

relates to the taxation of the trustees of settlements) to

section 109 of TCGA, which has effect in relation to

certain assets held at 31 March 1982 and is no longer

required following the compulsory rebasing to that

date.

48. Paragraph 70 is similar in nature to paragraphs 21 and 55,

removing provisions in other Acts that introduced

amendments to the TCGA that have now been removed

from that Act.

49. Paragraph 71 is the commencement provision for the

changes made by paragraphs 57 to 70. These have effect

in relation to disposals on or after 6 April 2008.

Abolition of halving relief

50. Paragraphs 72 to 76 provide for the abolition of halving

relief for CGT purposes. This is a relief that applies

where a gain accruing on the disposal of an asset between

31 March 1982 and 6 April 1998 had, under one of a



SCHEDULE 2

16

number of relieving provisions, been deferred (to come

into charge on the occurrence of some future event) or

rolled over against the cost of either another asset or of the

same asset in someone elses hands. As an example the

gain accruing on the gift of a business asset can be held

over. The effect of this is to reduce the amount for which

the done would otherwise be treated (for CGT purposes) as

having acquired the asset by an amount equal to the gain

accruing to the donor. The result is that the donors gain

is effectively charged to CGT when the asset is sold by the

done).

51. For historical reasons, where the deferral or hold-over

arose as a result of the disposal between 31 March 1982

and 6 April 1988 of an asset held at 31 March 1982 by the

person making that disposal, part of the gain that was

eventually chargeable at a later date (when the deferred

gain came into charge or the rolled over gain was

effectively charged as a result of a later disposal) would

relate to an increase in value in a period before 31 March

1982.

52. Such an outcome was contrary to the main purpose of what

is now section 35 of TCGA, to remove from the charge to

CGT gains relating to changes in value prior to 31 March

1982. So, as a rough and ready remedy, Schedule 4 to

TCGA provides that in cases of the sort described above,

half of the deferred or held over gain is effectively



SCHEDULE 2

17

exempted from tax (hence the commonly used name

halving relief).

53. Paragraph 72 of the Schedule provides for the TCGA to

be amended.

54. Paragraph 73 provides for the amendment of section 36 of

TCGA (which gives effect to the provisions in Schedule 4

to TCGA) so that it applies only for the purposes of

corporation tax.

55. Paragraph 74 amends Schedule 4 to TCGA. In particular,

paragraph 74(2) provides for amendment of Schedule 4 so

that it applies only for the purposes of corporation tax,

thus effectively abolishing halving relief for CGT

purposes.

56. The remainder of paragraph 74 makes minor amendments

to Schedule 4 consequential upon the restriction of its

scope to the purposes of corporation tax, for example,

removing from Schedule 4 references to provisions that

apply only for CGT purposes.

57. Paragraph 75, like paragraphs 21, 55 and 70, repeals a

provision of FA 1996 that introduced an amendment to the

TCGA that has now been removed.

58. Paragraph 76 provides the commencement rules. The

amendments made by paragraphs 72 to 75 have effect in

relation to disposals on or after 6 April 2008 in respect of

which Schedule 4 would apply were it not for the changes.



SCHEDULE 2

18

Abolition of indexation allowance

59. Paragraphs 77 to 83 provide for the abolition of indexation

allowance for CGT purposes. Indexation allowance,

computed by reference to increases in the retail prices

index, compensated for the effects of inflation so that gains

were not charged to the extent that they related to increases

in value due solely to inflation. Indexation allowance was

frozen for CGT purposes as at April 1998, so that it was

only available in relation to increases in the RPI between

the date of acquisition of the asset in question (or, if later,

31 March 1982) and April 1998.


61. Paragraph 78 abolishes indexation allowance for CGT

purpose by inserting into the TCGA a new section 52A

that provides that Chapter 4 of Part 2 of that Act (which is

the legislation in respect of indexation allowance) is to

apply only for the purposes of corporation tax.

62. Paragraphs 79 to 81 make minor amendments

consequential upon the abolition of indexation allowance

for CGT purposes.

63. Paragraph 82, like paragraphs 21, 55, 70 and 75, repeals a

provision of FA 1998 that introduced an amendment to the

TCGA that has now been removed.



SCHEDULE 2

19


amendments made by paragraphs 77 to 82 have effect in

computing gains on disposals made on or after 2008-09.

Simplification of pooling etc.

65. Paragraphs 84 to 100 amend the rules relating to the

identification of assets disposed of. These rules apply

when fungible assets (identical assets which cannot

therefore be readily separately identified, such as shares of

the same class in a company) are disposed of. Where

someone disposes of some of their shares (or similar

fungible assets), which they have acquired at different

times and at different prices, the rules are necessary to

determine what expenditure is allowable in computing the

gain on the disposal.

66. The existing rules provide a series of rules for the

identification of fungible assets. These rules are

complicated because of historic changes in the CGT rules,

such as the rebasing of expenditure to 31 March 1982

(subject to the kink test) and the introduction of indexation

allowance, and the later freezing of indexation allowance

and introduction of taper relief. The identification rules

vary between treating each acquisition of fungible assets as

a separate holding (notably assets acquired before 7 April

1965 or after 5 April 1998), and treating fungible assets

acquired over a period of time as a single asset, growing

and diminishing as assets are acquired and disposed of



SCHEDULE 2

20

(there can be two such pools, one covering assets

acquired respectively between 7 April 1965 and 31 March

1982, and between April 1982 and 5 April 1998.

67. To apply the existing rules, it is potentially necessary to

identify fungible assets disposed of with assets acquired in

the following order:

assets acquired on the date of disposal;

assets acquired in the 30 days following the date of

disposal (this is an anti-avoidance provision, intended

to prevent bed and breakfasting, under which

people disposed of assets and reacquired them within

the next few days, to realise losses or to realise gains

to utilise their annual exempt amount while still, in

effect, holding the assets);

assets acquired between 6 April 1998 and the date of

disposal, on a last in, first out (LIFO) basis;

assets acquired between 1 April 1982 and 5 April

1998 (these assets are treated as a single asset, known

as a section 104 holding);

assets acquired between 7 April 1965 and 31 March

1982 (also treated as a single asset, a 1982

holding); and

assets held at 6 April 1965, on a LIFO basis.



SCHEDULE 2

21

68. The abolition of the kink test, indexation allowance, and

taper relief provides the opportunity to simplify these rules

considerably. The single section 104 holding can in

future include all fungible assets acquired before the date

of disposal, and the order of matching can be reduced to:

assets acquired on the date of disposal;

assets acquired in the 30 days following the date of

disposal; and

assets in the enlarged section 104 holding.

As with the other changes in the Schedule, these revised

rules apply only for the purposes of CGT. The rules for

corporation tax are unchanged.


70. Paragraph 85 amends section 104 of TCGA. The primary

effect of section 104 is to provide that a holding of

securities (section 104 uses securities to refer to

fungible assets) is treated as a single asset, growing or

diminishing as securities are acquired and disposed of.

Before the changes, for CGT purposes a section 104

holding could not contain securities acquired before 6

April 1982, nor after 5 April 1998, while for corporation

tax purposes the only restriction was in relation to

securities acquired before 1 April 1982.



SCHEDULE 2

22

71. The effect of the changes to subsections (2) and (2A) of

section 104 by paragraph 85(2) is that, while the

corporation tax rules remain unchanged, the restrictions on

a section 104 holding for CGT purposes are removed, so

that, subject to the rules for same day acquisitions and

disposals and bed and breakfasting (see paragraphs 67 and

68), such a holding can include securities acquired at any

time.

72. Sub-paragraphs (3) and (5) of paragraph 85 remove

references to a provision, section 110A, that applies only

for CGT purposes in relation to indexation allowance, and

which is repealed as a result of the withdrawal of

indexation allowance for such purposes.

73. Sub-paragraph (4) of paragraph 85 adds a new subsection

(3A) to section 104. The effect of this subsection is that

section 35(2) of TCGA applies to securities in a section

104 holding that were held at 31 March 1982. This means

that the acquisition cost of those securities taken into

account in computing the allowable expenditure in relation

to the section 104 holding is their market value at 31

March 1982.

74. Paragraph 86 amends section 105 to make it clear that

securities acquired that are identified under section 105

with securities disposed of cannot form part of a section

104 holding.



SCHEDULE 2

23

75. Paragraph 87 amends section 106A, which supplies the

identification and ordering rules for CGT purposes. Sub-

paragraph (2) of paragraph 87 provides a rule similar in

effect to that which paragraph 86 provides for section 105,

that securities acquired that are identified under section

106A(5) with securities disposed of in the 30 days

preceding that acquisition cannot form part of a section

104 holding.

76. Paragraph 87(3) amends section 106A(6) so that it applies

only to relevant securities. Currently, section 106A(6)

provides a last in, first out (LIFO) rule for the

identification of both securities (as defined in section 104)

and relevant securities. Relevant securities, which are

defined in section 106A(10) (see paragraph 87(6) of the

Schedule) are certain securities to which special tax rules

can apply, and are excluded from inclusion in a section

104 holding.

77. The simplification of the rules for identification of

securities means that the LIFO rule is no longer required

for securities in a section 104 holding, as there is a single

asset, the section 104 holding, and no ordering rules are

required. But the LIFO rule is still required for relevant

securities, and paragraph 87(3) ensures that it applies for

relevant securities only.

78. Paragraph 87(4) and (5) makes changes that are

consequential upon the restriction of the LIFO rule to



SCHEDULE 2

24

relevant securities. As that rule will no longer apply for

section 104 holdings, and as there will no longer be any

1982 holdings for CGT purposes, the rules providing for

the interaction of subsection (6) with such holdings, and

providing acquisition dates for such holdings, are repealed.

79. Paragraph 87(6) amends section 106A(10). The

amendments remove a reference to a 1982 holding, and

replace a cross-reference to the meaning of relevant

securities in section 108 of TCGA with a direct

definition. This does not alter the meaning of relevant

securities for the purposes of section 106A, but merely

reflects the fact that in future section 108 will apply for

corporation tax purposes only.

80. Paragraphs 88, 89, 91 and 93 make minor changes to the

headings of sections 107, 108, 110 and 112 respectively.

These changes in headings have no effect on the operation

of those provisions, which apply only for corporation tax

purposes.

81. Paragraph 90 amends section 109, which deals with 1982

holdings, by providing that it is to apply for corporation

tax purposes only.

82. Paragraph 92 repeals section 110A. That section provided

rules for applying indexation allowance to a section 104

holding for CGT purposes, and is no longer required

because indexation allowance is no longer to apply for

those purposes.



SCHEDULE 2

25

83. Paragraphs 94 and 95 amend sections 113 and 114 so that

they no longer have effect for CGT purposes. These

sections provide rules for the operation of indexation

allowance in relation to calls on shares and options, and, as

a result of the withdrawal of indexation allowance for

CGT purposes, will in future apply only for corporation

tax purposes.

84. Paragraph 96, like paragraphs 21, 55, 70, 75 and 82,

repeals provisions of FA 1998 that introduced amendments

to TCGA that have now been removed.

85. Paragraphs 97 to 99 amend sections 147 and 148 of the

Income Tax Act 2007 (ITA). Those sections explain how

the CGT rules for the identification of securities operate in

relation to provisions that, in certain circumstances, give

relief for capital losses against income. The changes

remove references to a 1982 holding, as there will no

longer be such a holding for CGT purposes. Because the

ITA provisions need on occasion to look back to periods

before the changes covered by this Explanatory Note come

into force, one reference to a section 1982 holding is

retained, linked to a reference to an old section 104

holding (a section 104 holding as it stood before the

changes made by the Schedule). This provides the

necessary continuity for interaction of the old rules with

the ITA provisions.



SCHEDULE 2

26


changes in paragraphs 84 to 99 have effect for the

identification of securities disposed of on or after 6 April

2008.

Meaning of tax year

87. Paragraphs 101 and 102 make a minor amendment to the

TCGA so that references to year of assessment and tax

year can be read consistently across income tax and CGT

legislation without the need for specific provision to keep

references in the TCGA in step with references in the

Income Tax Acts.

88. Paragraph 101 amends the definition of year of

assessment in section 288 of TCGA to mean, tax year,

and then provides the definition of tax year, and

paragraph 102 makes consequential repeals to references in

FA 2005 and the ITA.

89. The changes made by paragraphs 101 and 102, which have

no effect upon the application of any item of legislation,

have effect on and after the date that Finance Bill 2008

receives Royal Assent.

BACKGROUND NOTE

Rate of CGT

90. Under current rules, an individuals capital gains

chargeable to CGT for a tax year (after deduction of



SCHEDULE 2

27

allowable losses, taper relief, and the annual exempt

amount) are charged to tax as though they were the top

slice of income for that year. So they could be charged at

10 per cent, 20 per cent or 40 per cent (or a combination

of those rates).

91. The changes announced at PBR replace this interaction

with income tax with a single rate of CGT of 18 per cent.

This single rate applies not only to individuals, but also to

the trustees of settlements and the personal representatives

of deceased persons, whose net chargeable gains are

currently charged to CGT at 40 per cent.

92. One consequence of the introduction of the single rate of

CGT is that the provisions that, in effect, charge the gains

of the trustees of a UK-resident settlement on the settlor (if

the settlor has an interest in the settlement) are no longer

required. These rules could alter the rate at which gains

were chargeable to CGT, depending whether they were

charged on the trustees or the settlor, but that is no longer

the case. So the Schedule repeals these rules (see paragraph

9 above).

Abolition of taper relief

93. The effect of taper relief is described at paragraph 23

above. For an individual liable to income tax (and hence

to CGT) at the higher (40 per cent) rate, the maximum

effect of taper relief is to reduce the rate of CGT to 10 per

cent in respect of a gain on disposal of a business asset, and



SCHEDULE 2

28

to 24 per cent in respect of a gain on disposal of a non-

business asset. From 6 April 2008, all gains will be

charged to CGT at the new 18 per cent rate.

Abolition of the kink test and halving relief

94. These reliefs, whose effects are described above at

paragraphs 34 to 37, and 50 to 52 respectively, apply only

in respect of assets that have been held since 1982 (for the

kink test) and (at the latest) 1988 (for halving relief). The

removal of these provisions simplifies the CGT regime in

relation to the comparatively limited numbers of cases in

which they would otherwise apply.

Abolition of indexation allowance

95. The effect of indexation allowance is described at

paragraph 59 above. Indexation allowance is relevant in

computing the chargeable gain arising on the disposal of an

asset that has been held since before April 1998. The

maximum indexation allowance would be available only

where the asset disposed of had been owned before April

1982.

Deferred gains

96. Certain provisions of the TCGA provide for the charging

of CGT in respect of certain gains to be deferred until the

occurrence of a later event.



SCHEDULE 2

29

97. The effect of the changes is that, where a gain that arises in

a tax year earlier than 2008-09 is deferred; the

computation of the deferred amount will take account, if

appropriate, of the kink test, halving relief and indexation

allowance. This figure of deferred gain will not be

affected by these changes.

98. However, taper relief will not be due if these gains come

into charge in 2008-09 or a later tax year. This is because

taper relief is due only when a gain is brought into charge,

and the deferred amount does not include taper relief.

Simplification of pooling etc.

99. The reason for identifying securities disposed of with

securities acquired, and the way the rules work before and

after the changes are described at paragraphs 66 to 69

above. The changes mean that in identifying securities

disposed of after 5 April 2008, all identical securities

owned are treated as part of a single pool (a section 104

holding), and the allowable expenditure in respect of that

holding will be the sum of:

the market value at 31 March 1982 of all securities in

the section 104 holding that were held at that date;

and

the actual cost or CGT acquisition value of all

securities in the section 104 holding acquired from

April 1982 onwards.



SCHEDULE 2

30

100. Where there is an existing section 104 holding at 5 April

2008, the record of the holding should distinguish between

the original cost and indexed cost. It is the original cost

(not the indexed cost) of an existing section 104 holding

that is taken into account in computing the allowable

expenditure in a new section 104 holding from 6 April

2008 onwards. Where there were any additions to a

section 104 holding between 30 November 1993 and 5

April 2008 under transactions (such as transfers between

husband and wife) that are treated for capital gains tax

purposes as giving rise to neither a gain nor a loss to the

person making the disposal, the amount of the original cost

will not include any element of indexation allowance. (In

such cases the indexation element was added to the indexed

cost of the holding separately from the original cost.)



SCHEDULE 3

1

EXPLANATORY NOTE

CLAUSE 7 AND SCHEDULE 3: CAPITAL GAINS TAX:

ENTREPRENEURS RELIEF

SUMMARY

1. Clause 7 and Schedule 3 provide for a relief (entrepreneurs

relief) so that the first 1 million of gains arising on or in

connection with disposals of the whole or part of a business

(including, in certain circumstances, disposals of shares or

securities) are charged to capital gains tax at an effective rate of

10 per cent. The relief has effect for disposals on or after 6 April

2008.


2. Clause 7 provides for the Schedule to be part of the Bill.


3. Paragraph 1 provides for the Taxation of Chargeable Gains Act

1992 (TCGA) to be amended.

4. Paragraph 2 inserts a new Chapter 3 into Part 5 of TCGA. That

chapter comprises new sections 169H to 169S of the TCGA.

Section 169H of TCGA introduction

5. Subsection (1) of section 169H states that Chapter 3 of Part 5 of

TCGA provides for a relief (entrepreneurs relief) from capital



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gains tax (CGT). This relief is in respect of qualifying business

disposals. Section 169S(1) provides that for the purposes of

Chapter 3 a business is a trade, profession or vocation that is

carried on commercially. References to business in this

explanatory note have the same meaning.

6. Subsection (2) explains what disposals are qualifying business

disposals, and where explanations of the terms used are found.

These are:

a material disposal of business assets (explained in section

169I);

a disposal of trust business assets (explained in section

169J); and

a disposal associated with a relevant material disposal

(explained in section 169K).

7 . Subsection (3) explains that for certain qualifying business

disposals, entrepreneurs relief is available only in respect of

disposals of certain assets (relevant business assets) (this is

explained in section 169L).

8. Subsections (4) to (7) explain the structure of the remainder of

the Chapter.

Section 169I of TCGA material disposal of business assets by

individual

9. Section 169I explains what is meant by a material disposal of

business assets.



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10. Subsection (1) of section 169I provides that a material disposal of

business assets takes place when an individual makes a disposal of

business assets, which is a material disposal.

11. Subsection (2) explains what is meant by a disposal of business

assets. This can be one of three disposals:

a disposal of the whole or part of a business (this is more

than a disposal of assets used in a business; it requires the

disposal of all or part of a business as a going concern);

a disposal of assets which were used for the purposes of a

business that has now ceased, provided they were in use for

those purposes at the time of cessation, or of interests in such

assets; or

a disposal of shares in or securities of a company, or of an

interest in such shares or securities.

12. Subsections (3) to (7) explain the circumstances in which each of

the disposals of business assets set out in subsection (2) is a

material disposal.

13. Subsection (3) provides that the disposal of the whole or part of a

business is a material disposal if the business is owned by the

individual making the disposal throughout the year leading up to

the date of the disposal.

14. Subsection (4) provides that a disposal of the sort described in the

second bullet of paragraph 10 above is a material disposal if the

business is owned by the individual making the disposal for the



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period of one year immediately preceding the cessation of the

business and the disposal takes place within three years of that

cessation.

15. Subsection (5) provides that a disposal of shares in or securities

of a company, or of an interest in such shares or securities, is a

material disposal if either of the conditions in subsections (6) and

(7) is met.

1 6 . Subsection (6) provides the first condition referred to in

subsection (5) (condition A). This is that throughout the period

of a year immediately preceding the disposal:

the company is the individuals personal company;

Section 169S(3) provides that a company is an individuals

personal company at any time when the individual holds at

least 5 per cent of the ordinary share capital of the company

and that holding gives him or her at least 5 per cent of the

voting rights in the company. Where two or more persons

hold shares jointly section 169S(4) provides that each person

is to be treated as holding the appropriate proportion of the

total holding and associated voting power. (For example,

where a husband and wife own a joint 100 per cent

shareholding equally they are treated as each holding 50 per

cent of the shares and 50 per cent of the voting power.); and

the company is a trading company or the holding company

of a trading group;



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Section 169S(5) provides that these terms are defined in

section 169A in broad terms, a holding company is a

company with one or more 51 per cent subsidiaries and a

company or group is a trading company or trading

group if the company or group carries on trading activities

and does not carry on other activities to a substantial extent

these definitions are the same as those used for the purposes

of taper relief; and

the individual is an officer or employee of the company or

of one or more companies that are members of the group.

17 . Subsection (7) provides the second condition referred to in

subsection (6) (condition B). This is that where the company

has, within the three years immediately preceding the disposal

ceased to be either a trading company or a member of a trading

group, relief is available if the conditions in subsection (6) were

satisfied throughout the period of one year immediately preceding

that cessation.

18. Subsection (7) does not apply where the company ceases to be a

trading company but becomes a member of a trading group, or

vice versa. Condition A can be satisfied if throughout part of the

period of one year referred to in paragraph 16 above the company

was a trading company and throughout the remainder of the

period was the holding company of a trading group.

19. Subsection (8) provides rules to ensure that entrepreneurs relief

can be claimed where the individual carries on business as a

member of a partnership. The subsection provides that:



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where an individual who carries on a business as a sole

trader takes on a partner or partners in that business, any

disposals of interests in business assets which he contributes

to the partnership can be treated as disposals of a part of the

business;

where an individual, who carries on business as a member of

a partnership, disposes of all or part of his interest in

partnership assets, that disposal can be treated as a disposal

of the whole or part of the partnership business; and

each individual who is a partner in a business at any time is

treated as owning the business carried on at that time by the

partnership.

The general effect of these provisions is that an individuals

transactions in connection with becoming or being a member of a

partnership can qualify for entrepreneurs relief as they would if

the individual carried on the business on his own account.

Section 169J of TCGA disposal of trust business assets

20. Section 169J explains what is meant by a disposal of trust

business assets.

21. Subsection (1) of section 169J provides that there is such a

disposal where three conditions are satisfied. These are that:

the trustees of a settlement dispose of settlement business

assets (see paragraph 22 below);



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an individual is a qualifying beneficiary of the settlement

(see paragraph 23 below); and

one of two conditions (the relevant condition, see

paragraphs 24 and 25 below) is satisfied.

22. Subsection (2) explains what is meant by settlement business

assets. These are assets which are part of the settled property of

the settlement and are:

shares in or securities of a company, or interests in such

shares or securities; or

assets that have been used for the purposes of a business, or

interests in such assets.

2 3 . Subsection (3) explains the circumstances in which an

individual can be a qualifying beneficiary in relation to a

settlement. The individual must have an interest in possession

(other than an interest in possession which has a fixed term) in

the whole of the settled property of the settlement or in a part of

the settled property that contains the settlement business assets

disposed of.

24. Subsection (4) describes the relevant condition that must be

satisfied if the settlement business assets are shares in or securities

of a company, or interests in such shares or securities. The

condition applies to the qualifying beneficiary the tests that would

have applied under section 169I(6) or (7) (see paragraphs 16 and

17 above) if the qualifying beneficiary were an individual making

a claim for entrepreneurs relief in relation to a disposal of the



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shares, securities or interests. So the condition is that throughout

a period of one year ending within the three years up to the date

of the disposal:

the company is the qualifying beneficiarys personal

company (see paragraph 16 above);

the company is a trading company or the holding company

of a trading group; and

the qualifying beneficiary is an officer or employee of the

company or of one or more companies that are members of

the group.

25. Subsection (5) defines the relevant condition in the case where

the settlement business assets are assets (or interests in assets) that

have been used for the purposes of a business. This condition

applies, in relation to the qualifying beneficiary, broadly the same

tests under section 169J(3) and (4) (see paragraphs 13 and 14

above) as would apply to an individual making a claim for

entrepreneurs relief in respect of a disposal of the assets. The

relevant condition is that

throughout a period of 1 year ending within the 3 years up

to the date of the disposal, the settlement business assets are

used for the purposes of a trade carried on by the qualifying

beneficiary, and

the qualifying beneficiary ceases to carry on the business at

some time during that 3 year period.



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26. Subsection (6) provides for subsection (5) to apply where the

qualifying beneficiary is a member of a partnership that carries

on the business. In such a case, the qualifying beneficiary is

treated as ceasing to carry on the business either when the

qualifying beneficiary ceases to be a member of the partnership,

or when the partnership ceases to carry on the business.

Section 169K of TCGA disposal associated with relevant material

disposal

27. Section 169K explains what is meant by a disposal associated

with a relevant material disposal. Briefly, an associated disposal

is a disposal of an asset owned by an individual and used for the

purposes of a business carried on by

a partnership in which the individual is a partner or

a company which is the individuals personal company.

28. Subsection (1) of section 169K provides that three conditions

(conditions A, B and C) must be met if a disposal is to be

associated with a relevant material disposal.

29. Subsection (2) provides condition A. This is that an individual

disposes of all or part of his interest in the assets of a partnership

or of shares in or securities of a company (or of interests in such

shares or securities), and this disposal is a material disposal of

business assets.

30. Subsection (3) provides condition B. This requires that the

disposal referred to in subsection (1) is made as part of the



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process of withdrawal of the individual from involvement with

the business of the partnership or the trading company (or from

involvement with the business of a company that is a member of

the trading group of which the company is a member).

31. Subsection (4) provides condition C. This is that the assets

disposed of by the individual in the disposal referred to in

subsection (1) have been used for the purposes of the partnership

business or company business referred to in subsection (3)

throughout a certain period. This is the period of one year

ending with either the date of the material disposal of business

assets referred to in subsection (2) or, if earlier, the cessation of

the partnership or company business referred to in subsection (3).

32 . Subsection (5) provides that, where all three conditions are

satisfied, the disposal referred to in condition B is the disposal

associated with a relevant material disposal.

Section 169L of TCGA relevant business assets

33. Section 169L provides that in certain circumstances not all the

disposals of assets that comprise the qualifying business disposal

are eligible for entrepreneurs relief.

34. Subsection (1) of section 169L provides that, where a qualifying

disposal is not of shares in or securities of a company (or of

interests in such shares), entrepreneurs relief is to be given only

in respect of disposals of relevant business assets.

35. Subsection (2) explains that subsection (3) contains a definition

of relevant business assets but that certain excluded assets, as



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defined in subsection (4), are not relevant business assets.

Subsection (2) also provides speci

details of the clause - the national...

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