Wednesday 26 May 2010

Concerns over possible CGT changes expressed by investors

Plans by the new government to increase capital gains tax in certain instances so that it more closely matches income tax have raised worries among investor groups.

The rate to which CGT, currently at 18 per cent, will rise has been a matter for speculation, although the new government has suggested that the tax due on the profits made from the sale of non-business assets could climb to match the higher rates of income tax. In other words, 40 per cent or even 50 per cent.

The present profit threshold at which CGT is triggered is £10,100, but this may, too, be altered, coming down as low as £2,000.

The change will affect those who own second homes, buy-to-let properties or portfolios of shares.

Properties

The National Landlords Association (NLA) has urged the government to clarify whether buy-to-let properties will be categorised as business assets. In which case, sales would qualify for the lower CGT rate.

David Salusbury, the NLA’s chairman, said that a CGT increase would “act as a barrier to further investment in residential property”. SEE NLA Campaign regarding Capital Gains Tax

Some experts in the market have been predicting that the change could herald a sudden surge in the numbers of buy-to-let properties that are put up for sale.


Investors


Fears exist that individual stock market investors could also follow suit and sell their assets in order to take advantage of the present 18 per cent flat rate. Narrowing the differential between CGT and income tax could see people in higher tax brackets capitalising on their gains ahead of the emergency Budget.

The British Private Equity and Venture Capital Association (BVCA) counselled caution on any rise in CGT rates.

Simon Walker, the BVCA’s chief executive, said: “We would caution against the assumption that any increase in CGT that could be used to reduce taxation elsewhere. The BVCA will, therefore, be actively engaging with ministers to urge them not to make any hasty decisions in this complicated area.”


CGT only raises about £3 billion annually in government revenue, and an increase in the rate charged on non-business assets is unlikely to make a substantial contribution to reducing the budget deficit.

Its primary purpose would be to prevent the conversion of income into capital and the exploitation of the gap between income tax and CGT.

The government has not made clear when any change would apply. It is possible that the new tax, when it is detailed in the emergency Budget, could be backdated to 6 April 2010, although such a move would be unusual.

Indexation and company share schemes

Indexation and company share schemes are other areas where worries have been voiced.

When the last Chancellor, Alistair Darling reduced the rate of CGT to 18 per cent two years, indexation was also removed.

Indexation took account of any increase in the value of an asset generated by inflation, so that the seller only had to pay tax on the actual return on their investment.

Should the rate climb to 40 per cent, there are worries that it would represent an unfair tax charge if indexation were not re-introduced and inflation, now up to 3.7 per cent, were not accounted for.

A Treasury spokesman said that there is a “range of possible options” on CGT and that “no decision has been taken on one option”.

A share ownership organisaton, ifs ProShare, has contacted Treasury minister, Mark Hoban, asking if the government intends to introduce an exemption for such schemes.

Supermarket chain, Asda has said that some 15,000 of its employees will benefit from a payout of around £47 million as part of the company’s three-year save-share scheme.

Some employees could make as much as £8,000 profit from the scheme, which, if the threshold is lowered, could make them liable to the new CGT charge.

Julie Richardson, of ifs ProShare, commented: “The principle of investing in the company you work for is a sound one. We would not like to see this undermined by potentially unintended consequences of CGT changes.”

The Treasury responded by saying that no decision has yet been taken on the status of company share schemes or their possible exemption.

The counter argument

One case to be made in favour of a CGT increase on non-business assets – such as second homes – is that if they are held to generate income – in the form of rents, say – rather than as a means of trading – sales – then the CGT rise will have no impact.

As with VAT, capital gains tax offers at least some discretion at whether it becomes payable or not.

Information provided without any responsibility for accuracy.

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