Capital gains tax (CGT)

Exemptions and rates of tax

The annual exempt amount has been increased in line with inflation for 2006/07 to £8,800 (2005/06 £8,500) for individuals.

The CGT liability is calculated as if the gains in excess of the annual exemption were the top slice of the individual’s savings income.

Trusts

The annual exempt amount is increased to £4,400 (2005/06 £4,250) for most trustees. The exemption is divided where there are several trusts created by the same settlor. Capital gains of trusts are taxed at the special trust rate of 40%. Changes are being introduced to bring the main trust-related definitions and tests for tax on income and chargeable gains into line with each other, mostly with effect from 6 April 2006.

Bed and breakfasting

The Government is to introduce measures, applicable to acquisitions on or after 22 March 2006, which will prevent avoidance of CGT by schemes exploiting the'‘bed and breakfast' identification rules. The rules were designed to prevent individuals and others disposing of shares and acquiring identical holdings shortly afterwards for the purpose of realising a capital gain free of tax (because it is covered by the annual exempt amount) or a capital loss which can be set against other gains while still, in effect, holding on to the investment. The amendment will close a loophole and prevent advantages being gained by persons who are 'Treaty non-resident'.

Inheritance tax (IHT)

Exemptions and rates of tax

It was confirmed that the IHT threshold would rise to £285,000 for 2006/07 and £300,000 for 2007/08. To continue to provide certainty for families, it was further announced that the threshold will be increased by more than the expected statutory indexation to £312,000 in 2008/09 and £325,000 in 2009/10.

The rate of IHT remains unchanged at 40%, with a reduced rate of 20% for chargeable lifetime transfers. It was estimated that the number of taxpaying estates in 2006/07 will be about 37,000, around six in 100 deaths.

Trust reforms

The IHT exemptions which presently apply to ‘accumulation and maintenance’ trusts (A&Ms) and/or ‘interest in possession’ trusts (IIPs) will be available only in certain prescribed circumstances. Otherwise IHT charges will apply in the same way as for all other trusts, preventing them from being used to shelter wealth from IHT. In effect all lifetime transfers into A&M or IIP trusts will be immediately chargeable to IHT and the usual regime of ten-yearly and exit charges will apply, unless the trust is set up for a disabled person. There will be transitional arrangements for existing trusts.

Pension reforms

Measures will be introduced to legislate an existing IHT concessionary practice for pension scheme members who die under the age of 75, and to set out how IHT is to be charged on death on or after age 75 where funds are held in an alternatively secured pension.