Capital Gains Tax - tax cut or tax hike?

Capital gains tax (CGT) has long been regarded as an unnecessarily complex tax. Alistair Darling obviously agrees - even though his predecessor had largely been the man to complicate it.

With effect from next April, capital gains tax will be a lot simpler, maybe cheaper for some but more costly for others. Both taper relief and idexation allowances are being withdrawn, as are the 'kink' test for assets held at 31 March 1982 and halving relief.

You will keep your annual CGT exempt amount, currently £9,200 for 2007 / 08 for individuals and £4,600 for trustees. Any capital gain which exceeds your annual exempt amount after April 2008 will attract a flat rate of tax of 18%.

Reaction to the proposed CGT changes was mixed. The Association of Chartered Certified Accountants commented that the reforms need to take into account inflationary relief, especially for assets. As it stands, the change will have a significant adverse impact on individuals who are holding assets going back to the 1970s and 1980s during the high inflationary era.

General investors in shares and those with buy-to-let or second properties, who achieve a minimum rate of 24% after 10 years ownership will find their position improved, although accumulated indexation allowance will no longer be available (which applied to assets owned before 1998). There will be no holding period required to benefit from this new rate.

However, entrepreneurs and taxpayers who hold shares in their employer will find a 10% rate replaced by one of 18%. The changes are likely to mean a flurry of sales in the period up to 5 April 2008, as people make sales to lock into current rates if this is to their advantage.

In fact, arguably the change to CGT is particularly bad news for owners of shares in business assets showing a potential rise from 10% (taking account of full business taper relief) to 18%.

Stockbrokers Killick & Co were positive, saying the change will lead to many choosing to sell investments when it's right to do so rather than holding on to investments in order to avoid a penal 40% tax. The market will therefore become much more liquid.

The Share Centre also welcomed the initiative, saying "This will provide a major encouragement for those investing in listed UK equities and should result in significantly improved liquidity."

However, Gavin Oldham, chief executive of the Share Centre, added, "At first sight the abolition of taper relief for business assets would appear to disadvantage companies traded on AIM and similar markets. However the HMRC background paper makes clear that other Business Asset reliefs remain in place (including Roll-over Relief and Gift Hold-over Relief), and that will provide some mitigation for the increase in taxation.

"There is no doubt, however, that general entrepreneurial activity in the United Kingdom will be adversely impacted by these changes, with risk-taking no longer recognised to the same degree. This would appear a significant move away from an 'enterprise economy'."

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