FINANCE BILL 2000
CLAUSE 37: APPLICATION OF STARTING RATE TO CAPITAL GAINS TAX
SUMMARY
1. Clause 37 provides for the whole or an appropriate part of the capital gains of individuals to be taxed at the 10% starting rate when their taxable income is lower than the starting rate limit. This brings the capital gains tax rates for individuals into line with income tax rates on savings income. The capital gains tax rate for trusts is unchanged at 34%. The clause will have effect for gains arising on or after 6 April 2000.
DETAILS OF THE CLAUSE
2. Subsection (1) inserts new subsections (1AB) and (1AC) into section 4 of the Taxation of Chargeable Gains Act 1992.
3. Subsection (1AB) provides that where, after allowable deductions, an individual has no income, or less income than the starting rate limit, then capital gains, equal in amount to the unused part of the starting rate band (or the amount of those gains if smaller), will be taxed at the starting rate.
4. Subsection (1AC) defines the unused part of the starting rate band for the purposes of subsection (1AB) as the amount by which the starting rate limit exceeds total income after deductions allowed by the Income Tax Acts.
5. Subsection (2) provides that the change will apply for the year 2000-2001 and subsequent years of assessment.
BACKGROUND
6. When allocating income and gains to tax rate bands, gains in excess of the annual exempt amount for any year, are treated as the top slice. In the tax year to 5 April 2000 gains are taxed at 20p up to the basic rate limit and 40p at the higher rate.
7. From 6 April 2000 the starting rate applies to capital gains. This change means that where a taxpayer has no income, or income which does not fully use the starting rate band, capital gains falling in that band will be taxed at 10p. This brings tax rates on gains into line with those on savings income.
8. 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) of the Taxation of Chargeable Gains Act 1992.
Example
9. The example below shows how the introduction of the starting rate will benefit an individual who has a relatively low income in excess of his or her income tax personal allowance, but also has gains over the annual exempt amount (£7,200 from 6 April 2000).
10. Take an individual with the following income and gains:
| savings income (in excess of income tax personal allowance) |
£ 500 |
| taxable gains (in excess of annual exempt amount) | £5,000 |
11. The position for 2000/2001 is compared with the position if the proposed change had not been introduced.
12. For 2000/2001
The rates at which the income and gains are taxed are shown in the following table.
| 2000/2001 |
Starting rate @ 10% 1-1520 |
Savings rate @ 20% up to 28400 |
Tax due |
| savings income | 500 | 50 | |
| taxable gains | 1,020 |
102 |
|
| 3,980 | 796 | ||
| total | 948 |
Previous position
The rates at which the income and gains would be taxed are shown in the following table.
| 2000/2001 |
Starting rate @ 10% 1-1520 |
Savings rate @ 20% up to 28400 |
Tax due |
| savings income | 500 | 50 | |
| taxable gains | 5,000 | 1,000 | |
| total | 1,050 |
In this case the tax saving is £102.