Changes to Capital Gains Tax

Alistair Darling announced in his Autumn pre-budget report that from April 2008, the taxation of capital gains would be changed from the current position, under which most taxpayers selling shares in a company would be taxed at an effective rate of 10%, to one where the flat rate charge would be 18%. The measure was brought in to counter what were seen as unfair gains being made by the private equity sector, but will actually impact anyone holding business assets, including shares in companies.

First, some numbers.

Since 1998, business assets have been taxed at 40% (or 20% for basic rate taxpayers, but as this won’t usually apply to individuals selling their companies, the figures used here will be for higher rate taxpayers). Against this, anyone holding business asses for more than two years have been able to claim 75% taper relief which brings the rate down to 10%. This has now been replaced with a flat rate charge on both business and non-business assets of 18%.

The reforms also get rid of indexation relief which enabled taxpayers to compensate for the impact of inflation on assets acquired before 1998.

At the moment, it is assumed that the tax free exemption – currently £9,200 per annum, will be retained but this remains to be confirmed.

How does this compare with other countries ?
At 18%, the UK would have some the highest tax on capital gains in the world. The United States has a flat rate of 15% (but likely to rise in three year time), France 16% and Italy 12.5%. Switzerland and New Zealand have nil rates. However, the rate for individual investors in Germany is 27% and Ireland 20%.

What’s happening now ?
Many bodies, from the CBI downwards are deeply unhappy about the way the changes had been introduced without consultation. The government have realised they have handled this badly and Alistair Darling has said that concessions will e announced in April, potentially mitigating some of the impact. There have been articles in the press about selling companies before the deadline, but as company disposals are long and complicated affairs and rushed sales will only benefit the buyer, this is unlikely to affect any but a tiny number of individuals.

We hope to cover further developments in future newsletters.

Will any budding entrepreneurs cry out “Oh my God, I’ve built my company launch plans on the assumption that CGT would be 10% and now it’s 18%. Ruined ! This whole capitalism business sucks, I’m off to be a teacher” ?
Probably not.