Emergency Budget: Capital Gains Tax to rise

Hotscot

TM1976 wrote: »

Thanks. This really was the point I was trying to make the 18% rate was a bit of blip in CGT rates.

I wouldn't endorse Wikipedia as a source of tax info but here is what it says: http://en.wikipedia.org/wiki/Capital_gains_tax

As for your friend as noted to uk1 she could avoid this tax by taking her holiday home as her permanent home and selling her current PPR.

Not too keen on W for this either but found the following in an HMRC document PBRN 17 ('cos I'm a "Newbie" I can't add links; sorry) dated 9 Oct 2007 relating to the change to 18% and what it was replacing:

5. Section 4 of Taxation of Chargeable Gains Act 1992 (TCGA) provides that an individual is currently chargeable to CGT at the rates for income tax on savings income (10 per cent, 20 per cent or 40 per cent in the tax year 2007-08), treating his or her net chargeable gains (after deduction of allowable losses, taper relief, any other relevant reliefs, and the AEA) as the top slice of his or her income.

This appears to support your view but confirmation of this and what was happening in earlier years would still be appreciated. For the record, my "expert" was acknowledged as one of the country's top tax accountants in his day but perhaps even he is finding it hard to keep abreast of CGT which, I guess, would support simplification!

Several people have mentioned to me the moving house routine but I think it highly unlikely that it would cut out all capital gains in a situation such as I have described. There are circumstances where HMRC concedes it could work but it seems to me it would be the exception rather than the rule. Again, I'd be delighted to be proven wrong.

It's important to get our facts as accurate as possible and make corrections when necessary and I am more than happy to do this.

uk1

TM1976 wrote: »

May as well quote the whole lot - sounded personal to me - sorry for any misunderstanding.

Not once did I state that as my personal position. In fact as you quoted me as stating, I even said:

Can you not understand why they might be a bit huffy at being cheated yet again? Most of this group have had limited or no gains on the capital value of their second property for several years and they've now seen that situation worsened by yet another deceitful plunder.

A few clues there then!

You must be a real hoot as a professional advisor. "Inaccuracy is our Forte"!

JamesU

Hotscot wrote: »

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.

There is no CGT tax on the original value of the asset, but there is an "inflation tax" on the capital gain. When indexation was removed and the CGT set to 18%, at this point in time investors holding long term assets were most likely to see an initial reduction in CGT tax. But this compromise only held for a short period provided there was no increase in the CGT rates or, alternatively, CGT rates were increased but with the reintroduction in indexation. And of course, the lack of indexing to inflation is increasing the CGT bill on the investments over time irrespective of whether a real gain is made on the asset.

Athough I expected changes to CGT in the budget, I was not overly concerned because any intelligent and reasonable person would immediately understand that a significant increase in CGT would have to be in conjuction with some form of indexing. I am shocked, furious and lost for words over the government's action to increase CGT rates without implimentation of some form of indexing.

Many investors holding long term assets with sizeable gains can expect to be penalised by this illusionary gain due to inflation and it is quite simply an "inflation tax" and not a tax on the capital gain.

Broadly speaking as I posted earlier, this inflation tax is around 30% of annual inflation compounded year on year and payable in full upon disposal of the asset (each individual case different depending on asset, any other reliefs and allowances, size of gain, personal tax etc). Typically one can expect this inflation tax on the capital gain on the asset to be in a 1-2% range. And if an asset is not appreciating in value, the relative effect of the inflation tax is to depreciate the return on the asset significantly the longer the asset is held.

When tapering/indexing was removed with the introduction of the 18% CGT rate, businesses immediately understood the implications of this inflation tax, there was substantial lobbying and this resulted in a retrospective ammendment so that eligible business assets were chargeable at a lower 10% CGT rate. But private individuals with non-business assets were ignored, CGT rates have now increased without indexing in the budget, and this issue is far more serious now.

Hotscot wrote: »

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 many views on this thread, but there is one common feature. All contributors seem to recognise that some form of tapering/indexing should have been reintroduced if CGT rates were increased. This is not the just the view of a few private investors who are currently upset with the changes and implications regarding their long term investments and taxation on capital gains. It is also the view and general consensus within past government policy, businesses, major accountancy firms and organisations such as the Institute of Fiscal Studies. In my personal opinion, the government's decision to ignore indexation is absolutely unjustifiable and demonstrates a complete lack of conceptual understanding and objective reasoning.

I have attached a link to the short article "Solutions to the taxing issue of capital gains" written by the Institute of Fiscal studies. It is a very interesting read, discusses CGT historically, politically and economically and also summarises the CGT situation very well in 4-5 key issues. And of course, one important issue highlighted in this article, but ignored by the Government is the need for indexation:

http://www.ifs.org.uk/publications/4999

JamesU

uk1

Excellent post JamesU .

The issue you eloquently .... and if I may say so elegently explained .... is compounded in my view ..... oh g*d. ........ I'm repeating myself again ...... because yet again it wasn't just the tax it was the deception yet again.

Brown deceived in his first budget with the tax on pension funds which started the slide. He single handedly killed pensions. Equitable life sent a shock to prudent people who discovered that government guarantees were a deception. Many Equitable Life members have died and still seen no justice. Pension investments were tightened ... people were told that they had to buy annuities in an awful market by 75 years of age regardless. So Brown forced people into investing in property in order to save for their old age when their occupation pension schemes were closed and they saw people lose their life's savings in EL. Also ... rather ironically ... a lot of clever city people levered their deposits with easy money and added to the problem.

The bubble in property led to personal over-leverage. It also led to the stupid 125% buy-to-let mortgages. It led to the collapse of the property markets upon which so much national wealth and spending is based. It led to the world-wide collapse of banks that were tipped over by deceitful packaging of highly levered mortgage derivatives. Pensioners are now being mugged to pay for those that benefited in the banking debacle. Not city people - not banks who have just been given a corporate tax reduction promise - but pensioners.

Brown has a lot to answer for. And now those that were forced into property with pretty limited alternatives avaialable - let's not forget - find themselves taxed worst than the nasty city people who can at least fully exploit their annual £10100 annually that caused it all and who on profit share that will be increased by the corporation tax decreases.. Not many pensioners can do that.

So in the end they soldiered on ... saving for their old age. And now inflation - caused by governments is being taxed.

The deception in the last budget was compounded by the excuse that indexation and taper were both complex and self-defeating - neither being true. A further deception. Even at it's very simplest they could have said that any asset held for longer than say 10 years is taxed at 18% .... or perhaps any asset held by pensioners is taxed at 18%. Not many pensioners in the city avoiding income tax as far as I'm aware. So why would that have been either complex or self-defeating?

And the reductions in tax relief on pension contributions for the senior people in corporations will edge them towards saying "s*d it ... let's freeze the pension fund and close it for new entrants .... I'm not getting anything from it".The next big one being the decpetion that pension funds are protected by the PPF which is not funded and never will be.

People who talk on soothingly on these forums about ISA's and how much people should be happy with what they have simply don't get the unfairness and nastiness of it all.

These people are the quitest and most uncomplaining in society. That's why I'm upset for the people who've been stuffed over and over again.

Anyway ..... back to cooking the curry ....

00ec25

John_Pierpoint wrote: »

Q. I’m selling a property. What is the date of disposal?

A. Where you sell a property under an unconditional contract the date of disposal for capital gains purposes is the date on which you exchange contracts. Where the contract is conditional the date of the disposal is the date on which the last of the conditions is met.
Guidance is available in the Capital Gains Manual on conditional and unconditional contracts.

isn't the default requirement in most contracts that it is "vacant possession" and thus surely this is a conditional contract as the condtion is not met until completion when vacant possession is fulfilled?

so the date is the completion not the exchange date for most house purchases?

John_Pierpoint

I understand that Britain now has the largest tax code in the world.

The more I read this sort of garbage, the more I become convinced that we need a simplification of the whole unmanageable bloated mess (rant over for now).

If you follow the linK in my posting you will come to half a dozen sections under "Land" claiming to refer to Date of Disposal and none of them actually define it.

However following a link from a manual I came to this little beauty:

CG14270 - Computation: date of disposal: conditional contracts

It can be difficult to recognise whether a contract is conditional. Many contracts contain conditions which are to be fulfilled. A contract is only conditional within the meaning of TCGA92/S28 if particular conditions have to be satisfied before the contract becomes a binding document. These are called `conditions precedent'. When these conditions are met the contract becomes legally binding. At that point the contract has become unconditional. The date on which the conditions are met is the date of disposal.
So it looks like when the tax man talks about a conditional contract it is only conditional when it cannot be legal until the condition occurs ie the condition is "conditions precedent" to the contract being legal.
I think they are visualising a contract that says something like - this contract for A to pay B 1,000,000 for the land known as "Home Farm Meadow" will only take effect when the Local Authority grants change of use to class xxx.(Something which may never happen).

If the seller were to leave his grandmother behind presumably the situation would be sorted out legally. The seller would compensating the buyer or the contract would be repudiated by the buyer and the Capital Gain would not occur.

Otherwise to make the contract legal all sellers would have to move into a hotel for the period between exchange and completion and probably put their furniture into store too.

jamesd

00ec25, exchange is the date and you'll probably be able to find some writing about BTL investors looking to exchange before the budget so that they could avoid any possible increases in CGT if you look.

There's a similar rule for shares. The deal date is the date that the sale is agreed even when settlement - delivery of the money and shares - is a few days later.

JamesU

For info, I have just come across this link here which is a letter from MP John Redwood to HM Treasury with views on CGT, dated 26th May 2010. It is quite remarkable and sums up a lot of what has been discussed on the thread:

http://www.johnredwoodsdiary.com/?p=6322


David Gauke MP
HM Treasury
Whitehall
London SW1


Dear David,

I am writing with a proposal on how you can amend CGT in line with Coalition government objectives. I understand your wish to tax short term gains as income, to prevent conversion of income into capital and to ensure short term traders and speculators pay their fair share of tax. I also appreciate the Coalition’s need for more revenues overall. The government has said it wishes to assist a substantial private sector led revival, and wants to see the enterprise sector create more jobs and homes for rent. The government needs a policy which allows reasonable freedom for people to invest, encourages those who are responsible and who make provison for their families and their futures, and is fair.

I suggest that you tax gains of under one year as income. I would suggest you tax them at 40% for higher rate payers, as I understand the 50% rate is a temporary measure. Were you to use the 50% rate it would need to be clear that you intend to go back to 40% for both Income and Capital Gains as soon as possible.

There is some suggestion that longer term gains should also be taxed at 40% with reliefs for business assets. This would deal with one of more damaging features of a high CGT rate regime, allowing entrepreneurs to set up and grow businesses which they can subsequently sell without paying a penalty rate. However it would leave long term savers, people owning buy to let properties, and people with savings for retirement which are not held within a pension fund having to pay substantial tax. This would include paying tax on inflation. Under previous CGT regimes people were allowed to deduct the inflationary element of the gain from the taxable amount. This Indexation allowance was removed in return for a much lower overall rate. It would be unfair to ignore this in a new scheme.

A big increase in the overall rate could well damage the revenue. The US and UK have both shown in the past that raising CGT rates cuts revenue. In the case of the USA where the figures are not affected by other changes to the tax base the figures are dramatic.In 1981 the US collected $28.5 billion with a tax rate of 24%. In 1982 they raised $26.95 billion with a lower 20% rate, only to see receipts soar to $37.85 bn the next year and as high as $97.33 billion in 1986.
In 1987 they raised the rate to 28%. Revenue plunged to $59.83 billion. They raised it again to 33%. Revenue briefly rose to $66.23 billion in 1988 then plunged again to $57.3billion, lower than when the rate was 28% and well below the levels when they had a 20% rate. In 2002 they raised $55 billion with a 20% rate. In 2004 this soared to $78 billion by lowering the rate to 15%. In 2006 they were bringing in $110 billion at the 15% rate.

I therefore suggest that longer term gains should be taxed at lower rates. If you taxed 2 year gains at 30% and three year gains at 20%, higher rates than the current one, you could tax gains of four years or more at 10%. This should increase the total revenues from CGT by the second year, and offer a stimulus to longer term investment. I would myself go further and offer no capital gains after five years, to send a strong signal to the world’s investors that the UK is back in business as a favourable location.

I have been swamped with support for these suggestions, both from around the country and from Conservative MPs. It would send a strange signal if a Lib/Con government decided to more than double the CGT rate set by a Labour government. It would damage the revenues and be unfair to anyone who saves, is prudent, or who ventures their money for the greater good. We should remember that competitor countries including Singapore, Hong Kong, and Switzerland impose no CGT at all.


Yours ever
John


Bloggers might like to send a version of this letter to their own MPs or the Treasury.



JamesU

uk1

JamesU

Unluckilly John Redwood believes and has stated quite clearly that this issue is now a past issue and that because of Labour support it will pass into law. It was largely his efforts that Osborne was referring to when he said "I have considered the representations to me ....." Redwood has told me that his view is that 28% is better than 40% or indeed 50% which was a real danger at one time - however unfair that would clearly be. He sees this as a limited success.

I'm a student of the unexpected outcome of converging trends.

In my view they'll be a quiet lull .... and then a few elderly people will make disposals and discover for the first time the additional tax take. I think a few stories in the press might make the issue rise up the agenda again once the coffers are slightly healthier.

A trend will be the elderly realising that they will go to prison if they don't pay tax for the "fat cat public sector pensions". Concessions will be made in settling what will be a bloody dispute about public sector pay and pensions, which will hack of the rest of the hard-pressed population. What will make a little difference will be stories in the press about pensioners paying out tax on inflation on their investments out of their pension provisions so that public sector workers can enjoy inflation protected pensions that are unaffordable to the rest of us.

JamesU

uk1 wrote: »

JamesU

Unluckilly John Redwood believes and has stated quite clearly that this issue is now a past issue and that because of Labour support it will pass into law.

Yes, it was mentioned on Newsnight last night that the budget proposals were agreed and have gone through.

JamesU