Monday, July 5, 2010

CGT rules unlikely to change again in this Parliament

I was fortunate to have the opportunity to clarify a point about CGT policy with Edward Troup during the Oxford University Centre for Business Taxation annual conference on Friday.

Ed is Managing Director of the Budget Tax and Welfare directorate at HM Treasury.

During his talk he had reiterated the Chancellor's observation that 28% was the highest rate it was worth having if you want to maximise the CGT tax take. Ed had also suggested that there was no serious prospect of the Government making any further material changes to the CGT system during the lifetime of this Parliament. To be fair he made clear this was a personal view and that he could not speak for ministers. But it was reasonable to draw this conclusion from what ministers had said both on and off the record.

So I asked Ed why this approach made sense given that there remains an incentive to convert income to capital to save tax. And also why no reintroduction of taper to reward those who invest for the longer term (eg: more than 2 years)?

Ed explained that taper reliefs complicate the tax system both by virtue of the legislation but also because of the need to 'date-stamp' every acquisition. This Government wants to simplify rather than complicate the tax system. Whilst there remains an incentive to convert income to capital this would only disappear, Ed believes, if you had the same headline rate and had to wait 5 years before a taper came into effect. That approach had been considered and dismissed as:
a) the overall tax take from CGT would reduce (as income tax rates are higher than 28% - see above);
b) a 5 year taper would lead to distortions caused by people holding onto assets for a minimum of 5 years to qualify for the taper.

Whilst I remain skeptical about both points I do accept that the system is simpler without a taper relief. I also accept that many alternatives were considered and dismissed. I still think it likely that one reason for the new system is that it required little in the way of new legislation and could thus be introduced in the next Finance Bill without any need for consultation etc. The rate has gone from 18% to 28% and the limit for entrepreneurs relief has gone from £2m to £5m. Simples!


  1. It has to be simple because taxpayers have to put their own computations on their tax returns.

    The more complex it is the more problems there will be.

    The easiest computation is proceeds less costs equals gain.

    Gain x 28% = tax

  2. Not simples!
    The new provisions for shares exchanged for QCBs mean a taxpayer could pay CGT at 15.55%, although the gain qualifies for entrepreneurs' relief!