Emergency Budget: Capital Gains Tax to rise

uk1

Thanks.

Edited to update: I've listened to the statement again and reread Hansard and it says:

I also considered in great detail the options presented to me for introducing tapers or indexation allowances, and concluded that the complexity and administration involved would have been self-defeating."

He also said

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 think that there was a clear intention to deceive which has currently still succeeded.

jamesd

It's perhaps worth recalling that one of the objectives was to do something about people who avoid paying income tax by generating capital gains instead of income. The Liberal Democrat rich paying less tax than the rest of us argument. The budget treatment of capital gains tax has exactly that effect, so that people paying 50% or 40% tax will end up paying 28% on capital gains if they switch substantial parts of their income into capital gains. Still some gain from avoiding income tax, but not as much of a gain as at 18%.

Those who should be unhappy are those who have become accustomed to making tens of thousands and more in capital gains as income every year and may now end up paying tax at 28% instead of 18% as a dodge to avoid paying 40% or 50% income tax. The budget does seem to be one that will raise more tax from people who use this avoidance method.

The tool of making pension contributions so you're not a higher rate tax payer still seems to be available, at least up to some limits, still to be determined. That can raise the limit before the 28% rate is reached by £30-50,000 depending on what the annual pension limit with tax relief turns out to be. Say it's the lowest £30,000 then that's a taxable income in that year of at least £42,375 + £10,100 + £30,000 = £82,475 before there's any need to pay 28% on capital gains.

Plus any principal private residence/flipping relief and lettings relief that may be available, potentially taking it to £122,475 with the £40,000 lettings relief, ignoring the PPR part completely.

A retired person over the age of 55 could take 25% of any pension contribution as tax free income and then take an ongoing income from the rest, taxed at whatever their usual rate for their new income turns out to be. But perhaps limited by their other income to a lower level of pension contributions.

Double this for a couple, so it's a gain of perhaps as much as £140,000 in one year for a couple each getting £12,475 in taxable income already. Plus any lettings and PPR/flipping relief.

And all this is in addition to the tax free income and capital gains available from ISAs and their predecessors, something at least some have used to garner tax free pots of over half a million Pounds in.

I don't know about you, but those limits don't seem to be unduly punitive to me if it wasn't for the lack of indexation relief. I do think that for cases like Hotscot's it's unfair to not provide some sort of indexation, solely on property and perhaps with a cap, to limit how much tax is paid on inflation for uncommon transactions rather than routine tax avoidance.

Hotscot, those numbers are getting pretty high. Are you sure you will actually have tax to pay even without tricks like gradual sale?

For uncommon transactions, gradual sale or exchange of the property with another person may be the way to go, since that can keep you under the annual limit. Hotscot, perhaps there's another local shop owner who would like to diversify a little and swap half ownership of their property for half ownership of yours? Split with your spouse, each swap half and that's only a quarter of the value changing hands per person in one year, which may be enough to completely avoid the higher rate of CGT.

Another approach you might consider is putting the property into a pension of the SIPP type, then having the rental income taken as part of your taxable income from the pension.

These rates aren't particularly pleasant, but it is worth a look at the income tax rates from 1973 to 1988 and pondering how unpleasant top rates from 60% to 83% were to give some context for this.

uk1

jamesd wrote: »

It's perhaps worth recalling that one of the objectives was to do something about people who avoid paying income tax by generating capital gains instead of income. The Liberal Democrat rich paying less tax than the rest of us argument. The budget treatment of capital gains tax has exactly that effect, so that people paying 50% or 40% tax will end up paying 28% on capital gains if they switch substantial parts of their income into capital gains. Still some gain from avoiding income tax, but not as much of a gain as at 18%.

Those who should be unhappy are those who have become accustomed to making tens of thousands and more in capital gains as income every year and may now end up paying tax at 28% instead of 18% as a dodge to avoid paying 40% or 50% income tax. The budget does seem to be one that will raise more tax from people who use this avoidance method.

For some reason that I do not understand you persist in making a completely different argument about a completely different bunch of people in order to contradict the entirely correct point I have made.

When the Chancellor said:

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

........ he was deceiving Parliament and the public. Virtually every person who has purchased as a long-term investment a second property and who now need to sell it in order to retire will not "continue to pay tax on their capital gains at 18%" but will pay a substantial part at 28%.

The other points you make - as with all your points are very clever but have nothing at all to do with the issue you seem intent to incorrectly contradict.

When he said "I also considered in great detail the options presented to me for introducing tapers or indexation allowances, and concluded that the complexity and administration involved would have been self-defeating" this in effect became an admission that he was including in his higher taxation target pensioners who had invested in second properties as a part of their savings plans for their old age - when they became disenchanted with pensions. When failing to make this clear in his statement - he was deceiving.

Argue all you want - and you will I'm sure - but they continue to be irrelevant to the issue I raised.

Hotscot

Thanks jamesd for your comments, which correctly reminds us of the need for avoidance measures. While the new rules will have some impact in forcing creative higher rate tax payers to pay 28% rather than 18%, it will remain well worth their doing in many cases so long as top rates of IT remain at 40% or more. Having said that, I know many higher rate tax payers who do not use this technique and I suspect there are relatively few who routinely do. Does anyone have figures?

For many who have already retired, the pension suggestions you make are probably not relevant. Nor should one assume that spouses will be able to enjoy similar benefits to one another when, in practice, they may have significantly different financial situations that cannot be balanced easily. And us older folk don't usually want to sell and buy after they've gone to great lengths to find the second home of their dreams (or has been made into it). The sale that is most likely will be when they have to move, usually for family or health reasons. Nice time to hit them with the same CGT as the then current high earners!

PEPS, ISA and other tax-beneficial vehicles from the past can and should be used by those who can benefit. But as uk1 says, the key issue here is CGT; the new rules, how they were introduced and the (possibly) unintended harsh impact on folk who may never have been higher rate IT payers in their lives. That's not me, by the way. Along with others, I am fighting for an important principle.

uk1

Hotscot wrote: »

But as uk1 says, the key issue here is CGT; the new rules, how they were introduced and the (possibly) unintended harsh impact on folk who may never have been higher rate IT payers in their lives. That's not me, by the way. Along with others, I am fighting for an important principle.

My primary motive as well. I'm fortunate enough that as long as I die at around 90 or less I'll always live with my wonderful wife in bricks and mortar and have Ocado deliveries and be able to travel and eat and drink well. I am very fortunate that through hard work I don't actually need any more. It is the deceit and cheating that for me is the issue and I don't like pensioners getting even more nasty suprises.

uk1

Just a further update. I've just received a note from an MP very prominent in the argument. He feels he has done all he can and that as the measure will be supported by the labour party that it will pass into law.

I guess that apart from moot discussions it is probably the end of the issue.

JamesU

uk1 wrote: »

Just a further update. I've just received a note from an MP very prominent in the argument. He feels he has done all he can and that as the measure will be supported by the labour party that it will pass into law.
I guess that apart from moot discussions it is probably the end of the issue.

In summary from my side:

(i) the government is penalising prudent long term investors that have tried to plan sensibly for their future retirement income.

(ii) many long term investors are likely to be pushed automatically into the 28% bracket on the majority of their capital gains

(iii) the CGT tax due at present is now 30% higher than before (see previous post for comparison of the three mechanisms in place over the last 10 years) with immediate effect, due to the combined effect of interplay between income thresholds/increased CGT rates/loss of indexing.

(iv) the Government is taxing past inflation on the investment

(v) the Government is taxing future inflation on the investment irrespective of any future capital gains. Hence if inflation is 3-4% on average (realistic based on past and future overall projections), and taxed at 28%, the government will receive CGT +1% minimum each year from now on and this is compounded annually for the remainder of the duration of the investment.

(vi) investors may incur an ongoing capital losses in real terms if the investment does not increase in value relative to inflation, and may need to consider selling their long term investment to avoid depreciation of returns caused by the new CGT calculations. Simple example: 100K capital gain after allowance, no increase in value, depreciating at 1%/annum minimum (future incremental CGT based on inflation) and compounded for the duration of the investment. Hence for current investments, based on future CGT increases at a minimal rate of 1K/yr (higher of course if inflation is greater than 3-4%), when this is compounded, real terms depreciation in value = 95K after 5 years, 90K after 10 years etc...(excel calculations).

A job well done by the Government: in disincentivising responsible long term retirement planning.

A job well done by the Government in taxing investors on past inflation: if you cannot gain revenues from income and UK growth, why not tax people on past inflation instead? Guaranteed income and quite inventive really.

A job well done by the Government in taxing investors on future inflation: other financial providers take annual % commission on investments irrespective of growth on the investment. Now the Governement will be able to do exactly the same by taxing investments at a future rate of at least 1%, more if inflation is higher. Again quite inventive really.

A job well done by the Government: obscuring the real % rate of CGT and additionally the impact of the CGT changes and yes for sure despite the honest public rhetoric, in reality "there was stuff in the small print." But no, despite any common belief, people are not that stupid.

A job well done by the Government: Accountants, solicitors and IFAs will be the benefactors in all this, good for the economy no doubt.

Italics: for the benefit of doubt, i do not think this is a job well done.

I would be interested to know if the mechanism of CGT implimentation was Conservative or Libdem decison making. In any case, of course Labour would agree to all of this.


JamesU

jamesd

uk1, I'm explaining who this government was trying to target and the sort of avoidance they were trying to block. If you're trying to come up with proposals, you'll have more chance of success if you can avoid undermining those objectives. Doesn't matter whether either of us agrees with the objectives, the Liberal Democrats made it clear that they wanted income tax rates and an annual CGT allowance of £2,000. What we got was less bad than that for those paying CGT, so some progress was made. Maybe there can be more, later.

JamesU, if I recall correctly, Liberal Democrat, Labour and Conservative policies all considered converting income into capital gains to be a form of avoidance that they wanted to prevent. So blaming all three seems the way to go.

uk1

jamesd wrote: »

uk1, I'm explaining who this government was trying to target and the sort of avoidance they were trying to block. If you're trying to come up with proposals, you'll have more chance of success if you can avoid undermining those objectives.

What on earth is it about my posts that makes you think I'm short on understanding what the government said they were trying to acheive?

Also, what is so difficult for you to grasp about the idea that indexation or taper relief would have accomplished exactly what the government was trying to achieve whilst probably increasing tax take and encouraging people to look after themselves?

uk1

JamesU wrote: »

I would be interested to know if the mechanism of CGT implimentation was Conservative or Libdem decison making. In any case, of course Labour would agree to all of this.


JamesU

Excellent post.

To answer your question it was a fudge from the agreement. I don't wish to be alarmist but there is a real risk that they will compound the "errors" you highlighted by reducing annual capital allowances (at the same time as increasing income tax allowamces towards the £10k) in future budgets in order to keep faith with the coalition agreement, which Lib Dem backbenchers have indicated is sacrasanct:

We further agree to seek a detailed agreement on taxing non-business capital gains at rates similar or close to those applied to income, with generous exemptions for entrepreneurial business activities.

I do not believe that they think that this budget has gone quite far enough.