Emergency Budget: Capital Gains Tax to rise

TM1976 wrote: »

I'm not really sure why CGT has created such a lot of dispute because even the current rates of 18% and 28% are a lot softer than the regime that was in place only a few years ago when income tax rates were used.

The phrase "a lot softer" might apply to higher rate taxpayers but for others it is not such a good deal. Previously they would have paid 20% CGT but only on a gain reduced by taper relief.

And if the gain came from business assets they now pay at 10% instead of the previous 6.25%.

A lot softer?

TM1976, uk1 is trying to incite unrest about this part of the budget. When it comes to indexation for a small number of properties that have been held for a long time, I agree with uk1.

Small number and long time because otherwise it's too easy to use property to convert income into capital gains and avoid tax. One substantial difficulty for both uk1 and Hotscot is that if you asked a typical Liberal Democrat or Labour MP who deserved to pay more CGT, second home owners would probably come second, only after bankers avoiding tax with capital gains. It'll be a difficult fight to win.

jamesd wrote: »

TM1976, uk1 is trying to incite unrest about this part of the budget.

There you go again.

TM1976 wrote: »

I'm not really sure why CGT has created such a lot of dispute because even the current rates of 18% and 28% are a lot softer than the regime that was in place only a few years ago when income tax rates were used. You only get taxed on the gain not the selling price and there is a £10,000 annual exemption every year.

It's true that without indexation and tapering people who have held the asset for a long time can get caught out, but that's not a lot different from those who have savings who also lose out due to inflation. At least with property you are protected against inflation for the original asset even if you have to pay tax on the eventual gain.

Oh dear! This is such an emotive subject but cool heads are required or we'll end up slagging everyone. :mad:

Until Mr Darling changed the rules to invoke an 18% flat rate CGT, Taper relief and, before that, Indexation were available to offset the worst effects of inflation. I did some calculations for someone I know well who was, and remains, a basic rate taxpayer and who had owned a second home for about 25 years at the time. The effect of 18% was significantly negative but not dramatic. It was a trade-off between simplicity for everyone and a bearable tax burden. Most important though, for basic rate taxpayers, there was no attempt to link income & capital gains in any way. This, of course, was the loophole exploited by the earnings rich and that was bound to be dealt with in due course.

However, the latest changes will treat basic rate taxpayers with a single gain after many years as if they were, in effect, high earners. On a like-for-like basis, "before" & "after" Emergency Budget calculations for my friend indicate a tax payable increase of 47% after allowances. In this case, that means around £20K of additional tax or a total of over £40K on a sale price of around £270K. Remember, this was a very long term holiday home/retirement plan. If my friend wished to move to a similar house in the same area, after CGT and other expenses (stamp duty, legal, estate agents, moving), I reckon she'd need around £49K from other resources just to purchase a house at exactly the same price as the one she was selling. That's around 18% (oddly enough) of the value of her home. Is she likely to move? Only if she has to from necessity. For someone who is almost 70, it's a tough obstacle.

The added problem for the elderly is one of uncertainty. By linking the higher rate of CGT to income + capital gains for the first time, almost anyone who has owned a home for more than, say, 15 - 20 years will become a higher rate candidate... for one year only! Twenty eight per cent today, what will it be tomorrow to catch those naughty, wealthy tax avoiders? As a previous contributor calculated, even at current rates, it is typically equivalent to a tax by government of around 1% per annum on the original value of the property. I call it a stealth-wealth tax, stwealth, for short! The gains arising from inflation are illusory and seldom benefit the long-term investor.

Two final points that seem to be overlooked at times. First, the Annual Exempt Amount ("AEA"), currently £10,100, is helpful where capital gains can be realised yearly. This is great for "punters" and those who are able to sell-off assets frequently. It is of little help to long-term investors, whether they be selling a property, works of art, tightly held shares in a private company (though some enterprise relief may be available here) or just liquidating a mixed portfolio for personal reasons in a single tax year. Health and family reasons can often necessitate this later in life.

Second, as I've said before on this thread, individuals have no control over inflation (primarily a government responsibility), it is only fair (to use the Chancellor's own expression) that an allowance be made for inflated gains. After all, we recognize the need for inflation-linked Government bonds and savings accounts. Why should other valuable assets not be treated in a similar way?

There are other points to be made but I'll let like-minded subscribers have their say. I hope, however, this post will help clarify a few issues in people's minds. It's a complex issue and is not just about money. I don't think our very talented but youthful Chancellor & Prime Minister have quite realised that, yet!

[/QUOTE]Ver articulately put. I wish I were as articulated as you.:D[/QUOTE]

Well, well. Complementary compliments? What next? :beer: