Capital Taxes

The annual exempt amount (AEA) has been increased for 2005/06 to £8,500 (2004/05 £8,200) for individuals and to £4,250 (2004/05 £4,100) for most trustees. The AEA is divided where there are several trusts created by the same settlor.

Taxable gains for individuals are taxed at the savings rate as if they were the top slice of income. The excess is taxed at 40%.

Capital gains of trusts are subject to tax at the special trust tax rate of 40%.

It was announced that gains arising on the disposal of a principal private residence will continue to be exempt from CGT.

Temporary non-residents

An individual, who resumes UK residence after a period of non-residence of less than five complete tax years, may be chargeable to CGT in the tax year of the return to the UK on all capital gains and losses that arose during the tax years of non-residence. For departures on or after 16 March 2005, it will not be possible to avoid this charge by exploiting the terms of certain double taxation agreements.

It will also no longer be possible to avoid this CGT charge by arranging to be resident, for tax treaty purposes, in a territory outside the UK while simultaneously being resident or ordinarily resident in the UK.

Location of assets

The statutory provisions that determine where certain assets are located for the purposes of CGT have been amended so as to tax certain gains that currently escape charge to CGT. The new rules will provide that assets (such as bearer shares in UK companies held outside the UK and formerly regarded as located outside the UK) are treated as being located in the UK and as such within the charge to CGT. These amendments will apply to all chargeable disposals made on or after 16 March 2005.

The provisions affect individuals who are UK resident or ordinarily resident but not UK domiciled and non-UK resident persons carrying on a trade, profession or vocation through a branch, agency or permanent residence in the UK.

Trustees

CGT will no longer be avoided by exploiting the terms of certain double taxation agreements where if at some time in the tax year when the gain arises the trustees are resident in the UK and not simultaneously resident in a territory outside the UK. This will apply in respect of all disposals of settled property by trustees on or after 16 March 2005.

Inheritance tax (IHT)

The Chancellor announced the following increases in the IHT threshold (2004/05 £263,000).

The rate of IHT remains unchanged at 40% for death estates and 20% for chargeable lifetime transfers.

It was announced that the estimated number of taxpaying estates in 2005/06 will be about 37,000. This is around six in 100 deaths