This post is one of a series on the changes to the UK personal tax regime introduced in the 2008/09 financial year.
All Capital Gains Tax charged at 18%
We all have a personal allowance, currently £9,600 (and distinct from your personal income tax allowance) before Capital Gains Tax is due. You are also allowed to dispose of personal goods of up to £6,000 every year, and generally your main home is free of Capital Gains tax as well.
After that, you’ll be charged on gains at 18%.
Rarely has a new law seemed so sensible, yet so widely derided by the press and public, as the rushed implementation of this flat Capital Gains Tax (CGT) regime.
The idea of a single, flat rate of CGT has much to commend it. Having a hodge podge of rates for AIM shares, business assets, and investments held for different periods of time was a pain in the
I once had to calculate the Capital Gains Tax due on a tranche of shares bought incrementally over several years of dividend reinvestment, which meant my block of shares had to treated as lots of individual blocks, each benefiting from different taper reliefs and compensation for inflation. Some gains were charged at 40%, the oldest much less that that – but still nothing like 18%.
Anyway, the maths was almost enough to send me back to a Building Society savings account.
One flat rate of Capital Gains Tax set at 18% and the abolishing of taper reliefs and the inflation-adjusting of indexation at least makes the maths easy, whether you’re a winner or a loser from the CGT changes.
So why the controversy over CGT?
Why? Because some people now have more CGT to pay, of course, particularly entrepreneurs and other holders of business assets (including certain savers in company share schemes). Nobody likes paying more tax.
The changes to CGT were partly introduced to try to increase the tax paid by private equity partners, who (until the credit crisis) were making headlines and vast sums of money while paying a lower-tax rate (NOT less tax in cash terms) than their cleaners, due to the 10% rate of CGT achievable if you held a business asset for two years.
The change to an 18% tax rate hikes their bills, although suspiciously they seem to be the only ones not complaining. Small businessmen and employees in share save schemes have also found their bills rising, and thus nodded vigorously to headlines pointing out their tax bill had risen by 80% (the rise from 10% to 18%).
Some even sold their businesses before April 6th 2008 to avoid paying more tax.
Most people in the UK never pay CGT; their only significant assets are their home, which is CGT tax free, and any pension, which is also not taxed for capital gains. Any share investments are also typically modest enough to keep free of tax in an ISA. Therefore the new rule is neither here nor there.
That said, with the rise in Buy-To-Let landlords, a fair few people will find their tax bills are lower when they come to sell investment properties – there the lowest that taper relief for several years of ownership could bring down a BTL tax bill was previously 24%.
You’ll also benefit if you’ve a very large portfolio over shares, which you haven’t been able to move into an ISA, or if you’ve lots of investments such as antiques or paintings.
The £1million tax break
For super rich entrepreneurs in the UK, life has got more expensive due to the rise in CGT, although 18% is still far less than the 40% rate they’d pay if they were earning via an income.
As a result of coordinating complaining, a loophole has been introduced enabling the self-made to claim up to £1million at the 10% rate over a lifetime, with greater earnings taxed at 18%. This Entrepreneur’s Relief is more designed to protect small family businessman due to retire than Richard Branson.
Other consequences of CGT
I think it’s right that entrepreneurs should be encouraged to set-up businesses, but I also highly doubt the change from 10% to 18% will do anything to stop them. The only way to get very rich from nothing remains the lottery or setting up a business. Smaller-scale businessmen are still being taxed more favourably than their peers in jobs.
A more ‘unintended consequence’ of the CGT changes is the Government appears to be encouraging speculation over investment. There’s now no benefit to holding a share for five years instead of five minutes, if you’re ready to take the gain. It makes life simpler, but it seems curiously free-wheeling for Gordon Brown.
Finally, expect to see various schemes and funds being marketed that turn dividend income into capital gains: A higher-rate tax payer will pay 32.5% on his share dividends from BP or Vodafone, but only 18% if he sells the shares. The Government will look to close down any blatant avoidance schemes, but is unlikely to do the sensible thing and reduce the tax rate on dividends to 18%, too.