Monday, October 22, 2007

PBR - CGT reforms. It's not all bad news

You might be forgiven for thinking that the proposed new 18% flat rate of CGT was bad news for everyone. There are certainly many legitimate complaints about the way this change was announced with no prior consultation as to the policy rationale or the behavioural changes it will encourage.

There are understandable concerns about the effective increase in tax from 10% to 18% for many people who might have generated capital gains after 5 April 2008. The abolition of taper relief has also generated understandable criticism. At the same time the abolition of indexation relief has almost been overlooked as has the fact that companies will still benefit from this relief. And where's the logic in that?

The other key question arising from the announced changes is the policy reason for reducing the basic rate of CGT from 40% to 18%. This effectively encourages speculative dealing to secure quick gains and also the conversion of income (taxable at 40%) into capital which will only be subject to 18% tax.

No doubt many people who might otherwise be selling non-business assets in the next few months will look for ways to defer the gain until after 6 April 2008 so that they can benefit from the reduced rate of CGT payable thereafter.