Thursday, May 27, 2010

Secret way to give immediate effect to CGT rate rise

When will the much trailled CGT changes take effect?

Until recently I was of the view that a rate change couldn't be introduced part way through the tax year (eg: on 22 June when the new Chancellor presents his 'emergency' budget). I don't imagine HMRC's software, or that of the commercial suppliers, could be reprogrammed to address such a change of tax rate part way through the year.

I remain doubtful that changes will be backdated to the start of this tax year on 6 April. And yet, if the changes only come into effect next year what's the point in making so much fuss now?

There is a relatively simple way however that an effective change in the rate of CGT could take effect from 22 June. It need be no more complicated than the introduction of entrepreneurs' relief which gives an effective rate of 10%.

This relief was introduced in a hurry in response to the outrage that followed Mr Darling's surprise move of reducing the headline rate of CGT from 40% to 18% just two years ago. One consequence of this change was the abolition of taper relief. As a result the effective rate on qualifying gains was to be increased from 10% to 18%. To calm the objections Mr Darling agreed that the first £1m of entrepreneurial gains would only be subject to an effective rate of 10%. (Now £2m since 6 April 2010).

The point is that there is no 10% rate of CGT.

Gains which are subject to an effective rate of 10% are computed by charging 18% tax on 5/9ths of the gain itself.
Assume a gain of £30,000. 18% tax thereon would be £5,400. Instead the tax is charged on £30,000 x 5/9ths. That's 18% of £16,666. This gives a CGT charge of £3,000 which is an effective rate of 10% on the £30,000 gain.
In the same way the Chancellor could announce that, with effect from 22 June, CGT will be charged at 18% on a multiple of everyone's gains.
For example, after computing the gain on disposal of an asset, assume you had a gain of £50,000. CGT at 18% thereon is currently £9,000. If however that 18% tax was charged on 2 x £50,000, that would give a tax charge of £18,000. This would be an effective rate of 36% which is "similar or close to [the 40% rate] applied to income" as promised in the coalition agreement.
I had been wondering about the wording of that pledge anyway. Why "similar or close to"? Why not "the same as" (as was the case for short term gains until 2008)? Maybe the secret is now out.
What do you think?

Previous posts that address the rate of CGT:


  1. Mark
    Are you saying that the apparent panic by second-home owners in unjustified?

  2. Depends why they're panicing!
    Until 2 years ago the CGT rate was 40%. If you owned your 2nd home or rented property for at least 2 years you only paid tax at an effective rate of 24% when you sold it. Now you'd pay 18% tax.

    In the future the tax rate may be higher. But tax doesn't arise until you sell and make a profit. If you weren't already planning to sell you shouldn't determine your plans by reference to uncertain tax changes in the future. It could all change again next year anyway. tax is like that!