An Irish Times guide to the world of personal finance.

One of the most radical changes in last week's Budget was the overhaul of capital gains tax. But who is liable to pay the tax and do they all benefit from one of the more acclaimed elements of Mr McCreevy's first Budget?

Capital gains tax (CGT) is a charge on the real profits from the sale of assets above a certain threshold. Prior to the Budget, the charge was generally 40 per cent on all profits above an individual threshold of £1,000. For married couples, the threshold was £2,000 and either partner could avail of that exemption.

For people investing in small and medium company stock, a special rate of 26 per cent applied within the same exemption limits.

In the Budget, Mr McCreevy cut the rate of tax to a single one of 20 per cent, with immediate effect. However, he also cut the threshold below which no tax is liable to £500 per individual, with no provision for transferring thresholds between spouses. The reduction in thresholds will take place next April.

The move was widely hailed by the markets and by the politicians as one which would free up money tied in long-term investments due to the previously prohibitive rate of tax for reinvestment in the economy. It was also heralded as a move that would encourage publicly-listed companies to give their staff a say in company affairs through the introduction of profit-sharing schemes, while the lower rate of tax would encourage employees to exercise their options under such a scheme.

Profit sharing

For the purposes of capital gains tax, employees in new or existing approved profit-sharing or share option schemes will now pay tax at only 20 per cent on the difference between the price, if any, which they pay for the shares and the price at which they subsequently sell them, after taking account of inflation. The tax is payable, from April, at the lower threshold of £500. In the interim, employees can benefit from the new tax rate but the old, higher £1,000 threshold.

It is arguable if many ordinary workers will indeed be better off given that few would have made post-inflation profits on the disposal of such shares of more than £1,000 in any given year - £2,000 if they are using the allowances of both spouses.

However, given that such shares have to be retained for five years and that the return on the stock market has far outstripped inflation in recent times, it is true that some people will have large capital gains that they have been reluctant to cash in because of the prohibitive tax charge.

Thus, it appears some workers will be paying tax on such schemes for the first time and, so, losing out, especially given the tighter thresholds.

Of course, at the upper end of the pay scale, company executives and directors in many cases are likely to benefit considerably from the cut in the tax rate, given the greater number of share options available at that level.

Small investors

While the big institutions will certainly benefit from the cut in the tax rate, smaller investors face a mixed bag. This is particularly true for pensioners who may use shareholdings built up in earlier years to augment their pensions.

Where currently they can gain £2,000 tax free each year as a married couple, now each is entitled to a tax free gain of only £500, and that only on those shares in their individual names.

Let's take an example:

If, in 1992, one invested £1,000 in shares which after accounting for inflation and the expenses involved in buying and selling them are now worth £2,500, the capital gain amounts to £1,500. Under the old guidelines, this would incur no tax bill; under Mr McCreevy's new proposals, £200 will be due in tax.

If that same £1,000 investment is now worth £5,000, the capital gain is £4,000, incurring a tax charge of £800 under the old system and £700 under the new one. Beyond this point, obviously, capital gains tax will fall under the new proposal benefiting those who have made a greater capital gain.

Exceptions

It is important to remember that capital gains tax is liable not just on shareholdings but on almost all assets including property, art and investments.

There are however some exceptions. These include:

the sale of either your principal residence or that of one of your dependants as long as it is not for development purposes;

profits on the sale of government stocks;

the passing on of a farm or business on retirement to a family member;

winnings from gambling or prizes;

life assurance policies or deferred annuities;

assets with a life of less than 50 years;

bonuses on State savings, including post office savings.

Send your queries to Q&A, Business This Week, 10-15 D'Olier St, Dublin 2.