1. This clause provides for changes to the rates of capital gains tax for individuals from 6 April 1999. Capital gains tax rates will be aligned with those for savings income so that gains, in excess of the annual exempt amount, are charged at 20 per cent where the aggregate of gains and total income is below the basic rate limit and 40 per cent to the extent that the gains included in that aggregate exceed the basic rate limit. The capital gains tax rate for trusts is unchanged at 34 per cent.

2. This will considerably simplify the rules for calculating the tax liability for many capital gains taxpayers under self assessment. The complex rules for those with savings income and gains will no longer be needed.

3. The clause will have effect in respect of gains arising on or after 6 April 1999.

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4. Subsection (1) provides that section 4 Taxation of Chargeable Gains Act 1992 will be amended in accordance with the following subsections of the clause.

5. Subsection (2) states that the reference to the basic rate in section 4(1) will be replaced by references to the lower rate. This reference is to the lower rate for income tax which will be defined in section 1A(1B) ICTA 1988 as equal to 20% or such other rate as Parliament may decide.

6. Subsection (3) replaces the reference in section 4(1AA) to section 686(1) of the Taxes Act with a reference to section 686 of the Taxes Act. Section 4(1AA) provides the link to ‘the rate applicable to trusts’ contained in section 686. This change follows changes in the wording of section 686, itself effective from 6 April 1999.

7. Subsection (4) states that subsections (1A), (1B), (3A) and (3B) of section 4 shall no longer have effect. These subsections contained the rules which ensured that tax on gains was calculated by giving benefit of the lower rate to gains, rather than income from savings. With the alignment of the rates for savings income (as defined in section 1A Income and Corporation Taxes Act 1988) and capital gains these rules are no longer necessary.

8. Subsection (5) is consequential on the repeal of subsection (3B).

9. Subsection (6) provides that the changes will apply for the year 1999-00 and subsequent years of assessment.

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10. To 5 April 1999 capital gains are treated as the top slice of income and taxed at the appropriate income tax rates of 20%, 23% or 40%, depending on the level of total income and gains.

11. The introduction of the 10p starting rate will see the lower rate of 20% disappear for everything but savings income (as defined in section 1A Income and Corporation Taxes Act 1988). This will mean inevitable changes for the CGT legislation which is presently drafted by reference to the 20% band and the limit to which that rate applies (the lower rate limit).

12. The measure affects individuals only; it does not apply to trustees or personal representatives of the estates of deceased persons, who will continue to be taxed at 34% in accordance with section 4(1AA) Taxation of Chargeable Gains Act 1992.

13. Some examples will illustrate how the new charging structure will work, and how it simplifies the computation of capital gains tax in comparison with the previous year.

Examples 1 and 2

Take an individual with the following income and gains:

The position for 1999-00 is compared with that for 1998-99.

The rates at which the income and gains are taxed are shown in the following table.

The rates at which the income and gains are taxed are shown in the following table.

The calculation for 1999-00 is less complicated than for 1998-99.

For 1998-99 where the income, other than savings income, is lower than the lower rate limit, the capital gain ‘displaces’ the savings income and is taxed at the lower rate.

For 1999-00, the savings income is treated as the highest part of total income and the capital gains rates are found by treating the capital gains as an additional slice on top of total income. There is no complex interaction between the capital gains and savings income.