Monday, May 17, 2010

Coalition CGT plans could cause problems for all

Back in March I predicted that the CGT rate will increase to 50% this year. I may be wrong. It may not be until next year.

The Coalition agreement declares the two parties:
"agree to seek a detailed agreement on taxing non-business capital gains at rates similar or close to those applied to income, with generous exemptions for entrepreneurial business activities".
Annual CGT exemption
The Liberal Democrat manifesto envisaged cutting the personal capital gains tax allowance to £2,000pa. There is no mention of this in the joint statement but reports suggest a reduction in the figure from £10,000 to just £5,000 or maybe £2,500 pa. If it's too low it will cause compliance headaches for anyone selling relatively low value assets who does not currently file an annual self assessment tax return.

Entrepreneurial business activities
Everyone is speculating as to what this phrase might mean:
  • Will it cover much the same as the (max £2m) gains that currently qualify for the entrepreneurial CGT rate of 10%?
  • Might this relief be extended to cover employee share option and share ownership schemes? This would strike a difference from the previous regime which only favoured entrepreneurs. I think it's optimistic but I agree that there is logic in providing a similar relief to the workers in entrepreneurial businesses.
Non-business capital gains
This would affect second homes, stock market investments and other short-term or speculative gains. What short memories some commentators seem to have. These were taxed at the marginal income tax rate (generally 40%) until 6 April 2008. The rate dropped to 18% only two years ago.

From 6 April 1998 inflationary gains were excluded through a taper relief which also gave a measure of relief for anything other than the most short-term gains. So longer term gains on non-business assets were often only taxed at an effective rate of 24%. It's reasonable to expect the re-introduction of a similar distinction between longer and shorter term gains.

Start date of new regime
Will it take place mid way through the current tax year or only be introduced with effect from 6 April 2011? If I were a betting man I would say the latter. Incidentally if the increase is deferred until 6 April 2011 there would be no additional CGT paid until 31 January 2013.

What are your views on the prospects of changes to the CGT regime?

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