Member Article

Capital gains tax reforms

With Watson Burton LLP Law Firm

Capital gains tax

Capital gains tax (“CGT”) is the tax charged on the gain arising from the disposal of a chargeable asset. In the pre-budget report made by the Chancellor, Alistair Darling, in October 2007, he announced controversial changes to the current CGT tax regime. His reforms have received intense criticism. As a result, there is speculation that he intends to make concessions to the proposals. The announcement of these amendments was anticipated before Christmas, but has subsequently been postponed until the New Year.

The current CGT regime

The CGT rate is currently based on the income tax rate of the person making a disposal and therefore ranges from 10% to 40%. However, a number of intricate tax reliefs are in place to reduce the charge to CGT.

Taper relief is one such relief. It applies to disposals made after April 1998 and operates by charging a reduced percentage of the gain to tax. The percentage of the gain which is chargeable is determined by the length the asset has been owned and the type of asset.

Indexation allowance was in place before the introduction of taper relief and applies for assets held at 5 April 1998 in order to cancel out the effect of inflation from the charge to CGT.

It is the reforms to these reliefs that have caused the most controversy.

The reform proposals

Alistair Darling announced his intention to introduce in the Finance Bill 2008 a flat-rate of CGT at 18% for disposals made after 6 April 2008, regardless of the asset and the length of time it has been held. The changes are intended to simplify the CGT tax regime by the withdrawal of taper relief and indexation allowance.

The attacks on the new regime are primarily levelled at the withdrawal of taper relief, with the criticisms being raised that the reforms discourage long-term investment and damage the UK’s entrepreneurial spirit. Suggestion has been made that leading businesses will be enticed to leave the UK for tax havens abroad.

The reforms announced in October to simplify the tax regime looked to impact hardest on business owners planning to sell their businesses to fund their retirement. However, those with buy-to-let properties and second homes look set to benefit and will see their tax bills fall.

Demands for a reversal of the reforms have been made by Confederation of British Industry, British Chambers of Commerce, Institute of Directors and Federation of Small Businesses. Although details of the concessions Alistair Darling will soon announce have not yet been made official, it seems that their objective of simplifying the regime remains intransient.

The Government does, however, appear to be attempting to take on board the calls from the business world and some concessions are expected. The suggested reforms put forward for the Government to consider include the retention of the 10% tax rate for those retiring, a lower tax rate for profits up to a certain level, or even allowing the first £100,000 to be tax free.

Whether the concessions to be announced will appease the critics, or what the long lasting implications of the reforms will be, remains to be seen.If you have any comments or questions about this article or about any other tax related matter, please contact eleanor.wild@watsonburton.com.

This was posted in Bdaily's Members' News section by Ruth Mitchell .