Capital Gains Tax reform - Darling tries again

Chancellor Alistair Darling did some fancy footwork last week to modify his plans to reform the capital gains tax (CGT) system. His original proposals of a flat rate of 18%, which he announced in his first Pre Budget Report in October 2007, and which were due to take effect in April, came with a sting in the tail. This was the abolition of so-called "taper relief" which allowed for less tax to be paid the longer the asset had been held.

Unfortunately, the proposals smacked of having been written on the back of a cigarette packet over the preceding weekend without having been thought through - as such they successfully alienated virtually everybody likely to be affected, including businesses of all shapes and sizes.

Under the old rules, which had been introduced by Gordon Brown initially in 1998, business assets held by individuals for at least two years attracted a maximum taper relief of 75%, while other assets were reduced by 5% per year once the asset had been held for three years, with a maximum of 40% after 10 years.

The proposed new rules meant that people selling their businesses could potentially face a tax hike from as little as 5% to the new rate of 18%, which business leaders claimed would act as a massive disincentive to entrepreneurs.

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Move over Darling...

Darling's climbdown, which came after extensive lobbying from business leaders and other interested parties, now gives small businesses a reprieve, with a buffer zone of just 10% on the first £1 million worth of capital gains over a lifetime before the 18% rate kicks in.

This new 10% rate, which is expected to knock £200m a year off the forecast of £900m annual revenue generated by Darling's original CGT reforms, will apply to anyone who owns a minimum 5% stake in a trading business, and is either an employee, company director or other office holder of the company.

But Richard Lambert, director-general of the CBI, believes the new rate would still act as a disincentive to entrepreneurs building long-term businesses. "The reality is that these revised measures will do nothing to help the real business powerhouses of this country - although £1m might sound a lot, it could have been built up over 20 or 30 years."

Simon Goldthorpe, director at Beacon Asset Management, said, "The concessions on CGT reforms are being seen by some as a triumph for businesses, their owners and common sense. Not so: they still represent a significant increase in taxes for UK business, with some estimating that nearly £1 billion of additional tax will be raised."

David Kilshaw, head of Private Client Advisory at KPMG in the UK, said, "Any relief is to be welcomed. For many smaller businesses, this is great news." However, he added, "The Chancellor promised a simplified CGT system, with one tax rate. Today's announcement has killed that hope. The new relief will add complexity. And this complexity will add to the red tape and costs for business."

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No relief for smaller investors

Those who failed to win any reprieve under the new rules are small investors who have bought shares in the firms they work for via employee share-ownership schemes, since the new relief will apply only to people who own at least 5% of the shares in any one company.

Paul Mumford, senior fund manager at Cavendish Asset Management, said, "In view of the savings crisis this Government has helped inflame over the years, this is certainly a missed opportunity. The Chancellor has been very careful to dress this statement up as a victory for enterprise, claiming his reforms will protect small businesses, angel investors and venture capital. Yet, to achieve all this, the Government is prepared to punish many a loyal, humble worker with almost double the rate of tax."

Also caught will be executives of large companies benefiting from share bonuses, because they too will own less than 5% of the shares in their company.

George Bull, head of tax at accountants Baker Tilly, reckoned that snaring the latter could be deliberate, "This may be a covert attempt by the Treasury to tackle generous share incentive plans for company directors."

You dont have to like tax but you do have to pay it. But are you paying too much? See if Moneyextra's Tax Centre can help tackle your tax bill.

29 January 2008 © Moneyextra.com

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