Rates and annual exemption
Gains continue to be taxed as the top slice of income. This means that a tax rate of 10%, 20% or 40% can apply.

The annual exemption, being the amount of gains that can be realised tax-free, is increased from £7,500 to £7,700 for the 2002-03 tax year.

Business assets taper relief
The significant improvements that had previously been announced have now been confirmed and are applicable to disposals of business assets that take place on or after 6 April 2002. The changes mean that qualifying business assets will benefit from 50% taper relief after being held for one year and 75% after two years, which, for a 40% taxpayer, equates to an effective capital gains tax rate of 20% or 10% respectively.

These changes significantly reduce the burden of CGT on disposals of business assets. However, taxpayers should ensure that they take every step to make sure that their assets, where possible, will in fact be regarded as business assets. For example, the extent of any non-trading activities within a company will need to be kept to a minimum so as not to jeopardise its trading status. Careful attention should also be given to the timing of disposals.

Definitions for business asset taper relief
Last summer the Inland Revenue issued its official views on the interpretation of various terms, and the rules are now to be amended accordingly. A "holding company" is now defined as one that has 51% subsidiaries, irrespective of its other activities. Whether or not a company is a "trading company" will now be determined by its activities, not its purposes. The rules relating to trading companies that invest in joint venture companies have been relaxed: it is now much less likely that such investments will result in a denial of the business rate of taper relief to the shareholders in a trading company.

An anti-avoidance rule relating to "changes of activity" of a company is to be repealed. In future, any periods of time after 5 April 1998 when a close company is not active will not count for taper relief purposes, but the old rule that could result in periods of activity being ignored if they were followed by a change of activity has been removed.

Certain terms used in the taper relief legislation have troubled tax practitioners since it was introduced. It is comforting to know that the Revenue's views on these matters will now become legislation.

Corporate reconstructions and share-for-share exchanges
A number of technical changes have been announced. The most important of these is, perhaps, that the rules for determining whether or not debentures issued in a take-over qualify as business assets, for taper relief purposes, will be similar to those that apply for shares and securities.

Non-business assets taper relief
There were no changes to the regime for non-business assets. It was however stated that consideration continues to be given to the case for change in order to encourage investment.

The maximum taper relief of 40% is achieved after an ownership period of 10 years after 5 April 1998, which, for a 40% taxpayer, equates to an effective capital gains tax rate of 24%.

Incorporation relief
Where individuals transfer a business to a company in exchange for shares they are deemed to make a disposal for CGT purposes. Incorporation relief allows the gains arising to be deferred against the shares such that a tax liability arises only when the shares are subsequently sold. The relief was mandatory and where the new shares were sold shortly after incorporation it could result in a smaller entitlement to taper relief than would have been the case had the gains been taxed at the time of the incorporation. In order to remove this inequity an election for the relief not to apply can be made for transfers of businesses on or after 6 April 2002.

It is relatively rare for this form of incorporation relief to be used and so the change would seem to be of little practical benefit. There may however be circumstances where an election might prove beneficial.

Trading losses and taper relief
Where trading losses arise in an unincorporated business, and they are in excess of any income of the same tax year, then the excess losses can be set against capital gains. A change will be made with effect from April 2004 (although taxpayers can elect for it to apply from April 2002) so that the maximum amount of losses that can be dealt with in this way is limited to the gains before taper relief rather than the gains after taper relief, which used to be the case.

Under the new system an element of the loss is tapered away and although this change is labelled as a simplification it seems also to be less advantageous to the taxpayer. It does, however, correct an anomaly whereby a claim of this kind could leave part of the gain taxable where the taxpayer was expecting full relief.

Employee share schemes
Legislation will be introduced to remedy a technical defect where employees acquire shares under different employee share schemes on a single day. The shares acquired may have different base values for CGT purposes, but at present all shares acquired on a single day are pooled. This may result in a capital gain arising where part only of the holding is then sold. After 6 April 2002, where two blocks of shares are acquired on a single day, they may be matched with those disposed of in the manner that produces the smallest gain.

A welcome acknowledgement of a point that, as legislated, had an effect that was not intended.