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Not Such a Capital Idea

Following the storm of protest that erupted after Chancellor Alistair Darling’s pre budget announcement that he intended to introduce a flat rate of 18 %  for Capital Gains Tax, it appears that the already beleaguered chancellor is softening his line.

In a speech to Confederation of British Industry members he indicated that he was “open to suggestions” on the forthcoming tax reforms.

In essence, the government wants to end taper relief, which effectively results in some Capital Gains being taxed at as little as 10%, and simplify the system with a uniform 18 %  rate from April 2008.

Mr Darling said it was “right and fair” for CGT to be applied at a flat rate adding it was “important” the tax system was “competitive, fair and simple.” However he did accept that his proposals are controversial.

“I am listening to what you say and will report to parliament very shortly,” he said.  However, he defended his lack of formal consultation insisting the government did not always have to consult on tax rates.

The CBI director general, Richard Lambert has warned of a “cry of rage” if the final proposals on CGT do not satisfy business leaders.

As in all tax change proposals there are winners and losers.  The winners will tend to be the owners of shares and funds who have built up enough capital gains to pay CGT.  Instead of paying anything up to 40 %  CGT, they will, from April 2008 pay a maximum of 18 %.  These will typically be fairly wealthy investors because each year everyone can shelter up to £7,000 in an ISA where any capital gain is tax free.

 The losers will tend to be business owners and private equity bosses who as investors owning shares in a private company were entitled to benefit from taper relief on business assets.  This could see them cutting their CGT rate from 40% to 10% once they had held the shares for 2 years.  Under the new rules they will be paying a flat rate of 18 %.

This is what is causing the howls of protest.

So, given that Mr Darling has signalled his willingness to listen, business owners looking to lock-into lower rates by selling their businesses ahead of next April’s rate jump, may be well advised to proceed with caution and not rush to sell.

 

For further information contact Jeff Harrison.

The information given in this article is of a general nature only and should not be considered as advice applicable to any particular situation for which specific request should be made to us.