Section 112 Finance Act 1990: Capital Gains Tax Implications

Section 112 of the Finance Act 1990 in the United Kingdom fundamentally altered the taxation of capital gains accruing to individuals and certain trusts. It significantly impacted how gains were calculated and, consequently, the amount of Capital Gains Tax (CGT) payable. Understanding this section is crucial for anyone dealing with asset disposals that occurred after its enactment.

Prior to the Finance Act 1990, indexation allowance was a key element in mitigating the effects of inflation on capital gains. This allowance effectively increased the base cost of an asset, reflecting the rise in the Retail Prices Index (RPI) between the date of acquisition and the date of disposal. However, Section 112 severely restricted this indexation allowance.

Specifically, Section 112 froze the indexation allowance for individuals at April 1998. This meant that for disposals made after April 1998, individuals could only claim indexation up to that date, regardless of how long they had held the asset. Any inflationary gains accruing after April 1998 became subject to CGT. This change was a deliberate measure by the government to increase CGT revenue.

The impact of this change was substantial. For example, if an individual purchased an asset in 1980 and sold it in 2005, they could only claim indexation for the period between 1980 and April 1998. The inflationary increase in value between April 1998 and 2005 would be fully taxable. This particularly affected long-term investors who had seen significant increases in asset values due to inflation over many years.

Furthermore, Section 112 introduced taper relief, a mechanism intended to incentivize long-term investment in business assets. Taper relief gradually reduced the amount of capital gain subject to CGT, depending on how long the asset had been held. This relief applied different rates for business assets and non-business assets, with business assets generally benefiting from greater reductions.

Taper relief, however, was eventually abolished in 2008, replaced by a flat rate of CGT. Nonetheless, understanding its introduction as part of the broader reforms under Section 112 provides context for the evolution of CGT in the UK. While the frozen indexation allowance has remained a persistent feature, the introduction and subsequent removal of taper relief illustrate the government's attempts to balance revenue generation with encouraging investment.

In summary, Section 112 of the Finance Act 1990 marks a significant turning point in the taxation of capital gains in the UK. By freezing the indexation allowance at April 1998 and introducing taper relief, it fundamentally altered the way capital gains were calculated and taxed, significantly increasing the CGT burden for many individuals and trusts. Understanding the legacy of Section 112 is essential for anyone seeking to navigate the complexities of CGT in the context of asset disposals.