Emergency Budget: Capital Gains Tax to rise

jamesd

uk1, it's a routine recommendation that people live in a place for a while to get the reliefs when they are getting into BTL property investing. There's no requirement to permanently move home, just live there for a while. The potential tax saving is more than a third of the national average wage and I do think that's worth some inconvenience.

Hotscot

Both uk1 and jamesd make very interesting points but I'm sure I won't be alone in saying the exchanges are getting beyond the ability of most of us to digest the advice that's relevant to us. uk1 seems to me to be closer to what those of us who are retired or near retirement might be capable of doing. The CGT changes do, indeed, pose serious problems, especially for long-term, occasional investors. On 9 June 2010, Mr Cameron was quoted as saying:

"There is a very big difference between the capital gains that someone pays on, say, a second home which is not necessarily a splendid investment for the whole economy there's a difference between that and actual investment in business assets," he said. "So we've said that we're going to look at a different rate between those two things and that helps actually again the fairness agenda. That helps us achieve the goal of lifting tax allowances, so we take more people out of tax. I think people will understand."

Therein lies our problem. We have first to convince him that property investing can be OK and then argue for indexation for long-term investors.

It is true that during the past few years, irresponsible lending by many banks and building societies has distorted the property market. But historically, owners of second homes have contributed positively to the economy in many different ways, from employing local trades people to providing rental and holiday accommodation. They often revitalise derelict or run-down properties and many do so from their own financial resources. To imply they are second-rate investors or even a burden on society is simply incorrect.

One should, of course, ask why someone who buys a second property and sells it many years later should not be taxed on the full gain? The answer is that as individuals have no control over inflation (primarily a government responsibility), it is only fair 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 manner?

And as I've said before, for the Chancellor to dismiss summarily taper relief and indexation as too complicated beggars belief and is an insult to the intelligence of most investors, young and old. Let's keep yelling!!!

John_Pierpoint

Individuals have no control over inflation (primarily a government responsibility), it is only fair that an allowance be made for inflated gains.

Golden rule Brown instructed the Bof E to maintain inflation at 2.5%, (however recently the extra money printed to replace the money lost in the banking fiasco has roughly doubled that figure) now 72/2.5 is 29 (approx) so taxation by inflation takes 29 years to steal half a saver's monetary wealth. Now that the country is in a real mess, passive savers have no power - they are just "useful fools" - visible in the rear view mirror, as we search for a new generation to pull the nation up by its bootstraps.

But historically, owners of second homes have contributed positively to the economy in many different ways, from employing local trades people [ & ] providing rental and holiday accommodation.

Ah yes, but if you do that you only pay 10% in your lifetime on your first 5,000,000 of [STRIKE]profit[/STRIKE] gain when you retire/flip your business.
Cameron is a man of his word.

jamesd

Hotscot, if you already own the property and it's one with a large gain I agree that it's tough. Like Labour's abolition of indexation this is another change that's effectively a retrospective change to your investment planning. Much harder to deal with at this point than earlier, when you could just have chosen different properties or sold and bought more often to limit the gain.

Another way that can reduce the CGT payable is to invest the gain in an enterprise investment scheme, then sell the EIS shares gradually. But EIS investing is high risk and not something to do without careful consideration.

Hotscot

How right you are jamesd on both points. In my case, there are two properties , each owned for almost thirty years, one by my wife and the other by me. My wife's has been a "holiday" home primarily although being used much more now that we have more-or-less retired. It was a long-term purchase, possibly for retirement. To have bought and sold would not have been practicable and, unfortunately, John_Perpoint, even if it did qualify for business relief, it would only apply from when it was being rented out regularly. The other property is a small shop on a 20 year lease sub-let to a small, local trader. The catch is that the head tenant is a massive plc so that won't qualify either! It is a retrospective, nasty tax that can easily be increased at any time, possibly in line with IT. I remember 83% higher rate income tax PLUS a 15% investment income surcharge =98% total. That was confiscation, not tax! I just didn't expect a Tory government to treat the elderly and long-term investor so thoughtlessly. It is sad & painful and many will suffer unfairly. If inflation soars again, as it may well do at some point, even folk investing long-term today will suffer.

John_Pierpoint

I feel a completer hypocrite posting this; because I too have benefited from a massive so called capital gain. In money terms think of a number multiply it by 7 and then multiply it by 10 (It does not look so impressive if you index it by inflation over 40 years.). In my case I have realised that gain before the budget.

But what did you and I do to deserve that gain ? Surly all we did was to deprive someone else of the opportunity to live in this "spare" house.

I don't think I want that written on my grave stone.

uk1

Hotscot wrote: »

Both uk1 and jamesd make very interesting points but I'm sure I won't be alone in saying the exchanges are getting beyond the ability of most of us to digest the advice that's relevant to us. uk1 seems to me to be closer to what those of us who are retired or near retirement might be capable of doing. The CGT changes do, indeed, pose serious problems, especially for long-term, occasional investors.

And as I've said before, for the Chancellor to dismiss summarily taper relief and indexation as too complicated beggars belief and is an insult to the intelligence of most investors, young and old. Let's keep yelling!!!

Thanks for appreciating the point I made.

It only occured to me after I had emailed a few people who were sitting within a few feet of Osborne that it was clear that they did not understand the cgt detail. They heard and took at face value the assertion that only higher rate tax payers would pay cgt at 28%. Thay had been deceived into believing this was a tax on fat cats on their city avoidance bonuses. That satisfied me for a moment or two and I believe MPs were and still are satisfied.

What they hadn't appreciated was that people who had been basic rate taxpayer for all of their lives but had bought a second home would become higher rate taxpayers on the disposal and pay the 28% on part of the gain.. That was where Osborne misled. From reading all that I have seen reported I'm not certain this has still been grasped yet. When people who have never been higher rate income tax payers start seeing tax paid at 28% on their second property - irrespective of one's veiws about second homes or the fairrness of the tax - people will feel that Osborne purposefully misled in order to get through the day. I think they'll be a backlash when MP's realise that they had "misunderstood".

Mikeyorks

uk1 wrote: »

They heard and took at face value the assertion that only higher rate tax payers would pay cgt at 28%. Thay had been deceived into believing this was a tax on fat cats on their city avoidance bonuses.

And do you believe that?

As the same people would also purport to have been misled, regarding the impact on the lower paid / pensioners, when the Chancellor abolished the 10% tax rate 2 years ago. And it took several months before MPs allegedly appreciated that which dawned on some of us before the Chancellor had even completed his speech. Eventually leading to an extra £600 PA for all of us and more for the 65+ range.

Leading to the conclusion? That they're either all stupid. Or they only get enraged when a potentially disadvantageous backlash occurs - as happened with the 10% rate.

As Treasury had the fine detail of the CGT machinations on their website just after the Chancellor parked his bum ...... I go for the latter - but with a large dollop of the former mixed in. Whilst the Budget proposals are run as 'top secret' within Govt ....... I don't believe that at least the front bench aren't privy to the core detail.

uk1

Mikeyorks wrote: »

And do you believe that?

As the same people would also purport to have been misled, regarding the impact on the lower paid / pensioners, when the Chancellor abolished the 10% tax rate 2 years ago. And it took several months before MPs allegedly appreciated that which dawned on some of us before the Chancellor had even completed his speech. Eventually leading to an extra £600 PA for all of us and more for the 65+ range.

Leading to the conclusion? That they're either all stupid. Or they only get enraged when a potentially disadvantageous backlash occurs - as happened with the 10% rate.

As Treasury had the fine detail of the CGT machinations on their website just after the Chancellor parked his bum ...... I go for the latter - but with a large dollop of the former mixed in. Whilst the Budget proposals are run as 'top secret' within Govt ....... I don't believe that at least the front bench aren't privy to the core detail.

Er ... yes I do believe that because that's what I said.

When exactly do you think that those sitting in The House read the fine detail in the Red Book? And how many of them would have understood the implications even if they did? of cgt exactly? Do you think that when any of them actually looked at the Red Book? And how many of them would look specifically at the CGT section?

They heard the Chancellor say:

One of the most chaotic areas of tax that the new Government inherited from their predecessor is the capital gains tax regime. Some of the richest people in this country have been able to pay less tax than the people who clean for them. That is not fair, and it stems from the avoidance activity that has exploited the wider gap between the rate of capital gains tax and the top rates of income tax. Those practices are costing other taxpayers more than £1 billion every year.

It is therefore right, as set out in the coalition agreement, that capital gains tax should increase in order to help create a fairer tax system. I have listened carefully to everyone's views and considered all the options. My concern has been to balance the competing demands of fairness, simplicity and competitiveness-and I believe my decision gets that balance right. Low and middle-income savers who pay income tax at the basic rate make up over half of all capital gains taxpayers. They will continue to pay tax on their capital gains at 18%. From midnight, taxpayers on higher rates will pay 28% on their capital gains. I have also decided that the annual exempt amount for capital gains tax will remain at £10,100 this year, and will continue to rise with inflation in future years.

The bulk of the MP's in the house stayed and heard the "reply" from Harmon. That finished at around 13:45 when most of them went for a pint or some lunch. Some stayed on in the house from where they Blackberried. By the end of lunch many MP's had tweeted or blogged - including many "prominent in the argument" that the budget had been good so far as cgt was concerned because only higher tax payers would pay 28% - and that wasn't 40 or 50% - and it was clear from what they said that they had simply taken the Chancelor at his word and missed that long-term second-home purchasers would be taken into the higher tax bracket.

It is pathetic to assert that they are stupid because they might have missed this issue.

Hotscot

Extract from Chancellor's Budget Speech:

Low and middle-income savers who pay income tax at the basic rate make up over half of all capital gains taxpayers. They will continue to pay tax on their capital gains at 18%. From midnight, taxpayers on higher rates will pay 28% on their capital gains.

With considerable reticence, I find myself siding with UK1's arguments, not because I doubt his/her reasoning (I am impressed by it!) but because when I listened to the Chancellor's speech live, I was left with no doubt about what was happening. This was reinforced by his comments about not having to read any small print.

Imagine my astonishment when several hours later, I saw the HMRC announcement with examples. If the Chancellor and the Prime Minister did miss the full meaning of what was being implemented, they would have great difficulty admitting this. Could it really have happened? With MPs, yes. But the PM & the Chancellor? Looks like a conspiracy theory might be developing!

As uk1 said in an earlier posting: " I think they'll be a backlash when MP's realise that they had "misunderstood".

Indeed. A misleading Budget statement, retroactive increased taxation and unintended consequences for basic rate taxpayers. The whole matter is riddled with confusion and uncertainty and the sooner the politicians (and the media) recognize this, the better. Glad folk here seem a bit more switched-on!:T