Sweeping changes were recently announced in the Pre-Budget Report and this could mean significant changes in capital gains tax and inheritance tax from the 6th April 2008. The changes to capital gains tax are particularly interesting and have caused concern to business areas.

For all disposals from the 6th April 2008 the taper relief has been swept away and a flat rate of capital gains tax of 18% will be applied on the gain arising. The current regime charges tax at either 20% or 40%. Consultation is ongoing in this area and as a result this measure still has to be confirmed by the Chancellor. His decision is due to be announced during the first quarter of 2008.

Indexation is currently available on all assets for the period 1st April 1992 to 5th April 1998. The relief effectively raises the original cost of the asset in line with inflation, for instance if an asset was held in March 1982 the original cost can be increased by over 100%. Under the new regime indexation will be abolished completely. In addition, if you acquired an asset prior to the 31st March 1982, you can elect to use either the actual cost of the asset or the value at this date when calculating the profit on disposal. From the 6th April 2008 you can only use the value as at 31st March 1982. This has a negative effect where the value of the asset in March 1982 was in fact lower than the original cost. Currently the rate of taper relief varies on the length of ownership of the asset and the type of asset. A non business asset benefits from 0% to 40% relief over a 10 year ownership, whilst business asset taper relief is far more generous offering up to 75% relief with the maximum available after only 2 years. Therefore if you are higher rate taxpayer with a qualifying business asset and you have held this for only 2 years, you can currently expect to pay a rate of 10% on the asset disposal.

Under the new regime, the tax rate will be 18% for disposals made after the 6th April 2008. It remains to be seen if these changes are incorporated in the Finance Bill. It is worth taking advice now however if you have chargeable assets that you are considering selling.

With effect from April the surviving spouse may now add the unused percentage of the nil rate band from the first death`s estate onto their own nil rate band. This will apply to the estate of anyone who died after October 2007. Therefore in the example of a husband predeceasing a wife and all of the assets have been passed to the surviving wife, then on her death the nil rate band would increase by £300,000, representing 100% of the unused nil rate band on the first death.

From the 6th April 2008, if you are non UK domiciled and have been resident in the UK for 7 years and have offshore investments then you will have the option of either paying tax on your worldwide income or paying an annual flat rate tax charge of £30,000.