Emergency Budget: Capital Gains Tax to rise

uk1

Hotscot wrote: »

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

It wasn't the only deceit. Unluckily an other was the implication that the change in the method of calculating state pension increases was going to give pensioners larger increases .... well that was what I thought I heard:

First, we will provide lasting help for pensioners. The earnings link was broken by the last Conservative Government, and was never restored through 13 years of a Labour Government. That meant that each year more and more pensioners were drawn into the means test, which punished those who had done the right thing and saved for their retirement. I can announce today that from April next year we will re-link the basic state pension to earnings. Now pensioners can save with confidence. They will also be protected by our new triple lock, which will guarantee each and every year a rise in the basic state pension in line with earnings or prices or a 2.5% increase, whichever is the greater. There will be no more 75p increases in the basic state pension. With this coalition Government, pensioners will have the income to live with dignity in retirement.

In fact RPI would likely have given a 3.2%+ increase ..... because RPI is currently higher than earnings increases, CPI and 2.5%!

I think when people work that out they might be a bit miffed.

JamesU

uk1 wrote: »

It wasn't the only deceit. Unluckily an other was the implication that the change in the method of calculating state pension increases was going to give pensioners larger increases .... well that was what I thought I heard:



In fact RPI would likely have given a 3.2%+ increase ..... because RPI is currently higher than earnings increases, CPI and 2.5%!

I think when people work that out they might be a bit miffed.

For sure, as and when this triple lock is introduced, if CPI is used for index linking rather than RPI this will be detrimental to pensioners as the CPI is lower than RPI in general. It will also cause serious ambiguity in any governmental approach if CPI is applied to state pensions, because civil service/public sector pensions are index linked to RPI. And any attempted changes to the RPI linking on public sector pensions may have legal ramifications for those currently receiving a public sector pension, or for those no longer employed in the public sector, but who do have a frozen pension in place in retirement. A real mess possibly. I find it difficult to see how the government will be able to link previous public sector pensions to anything other than RPI. And if CPI is used for state pensions, without a similar change applied to public sector pensions, this will result in serious controversy.

However turning things on their head here with an analogy that is closer to home on this thread:

Take a pensioner on 15,000/yr expecting a 3% increase in pension in line with inflation (irresepctive of whether this is based on RPI or CPI). The government decides to take a 1% cut so that instead of receiving e.g. 3% (£450), the pensioner receives a lower 2% increase (£300). Then follow the same procedure each and every year. How would pensioners feel about being taxed on inflation in this manner year on year and also receiving a below inflation pension increase each year? Somehow I do not feel the government would be allowed to get away with this.

Now take a long term investor making prudent plans to be secure financially in retirement. In this case for any capital gain on long term investments made at present, at approx 3% inflation the government will indeed be taking 1% of the whole capital gain on the investment each and every year for the whole duration of the investment.... conditions: payable in full, with the annual deduction of the "inflation tax" compounded year on year, and payable in full when the investment is sold and the CGT is due. In this example, unlike the analogy with pensions above, the government at present does seem to be able to get away with this.


JamesU

Elaine_Wilson

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.

I too thought this was misleading.

He also decided that indexation and taper relief make things too complicated. I can just about accept this on the basis that -

indexation is compensated for by not charging CGT at income tax rates, and
taper relief would reduce the bill for all taxpayers who were long term investors, including those already paying higher rate tax.

But to achieve the statement in bold surely he could have introduced a top-slicing relief. Long term basic rate taxpayers would have had a fighting chance of only paying 18% on their gains, as he implied in the speech.

uk1

Elaine_Wilson wrote: »

I too thought this was misleading.

He also decided that indexation and taper relief make things too complicated. I can just about accept this on the basis that -

indexation is compensated for by not charging CGT at income tax rates, and
taper relief would reduce the bill for all taxpayers who were long term investors, including those already paying higher rate tax.

But to achieve the statement in bold surely he could have introduced a top-slicing relief. Long term basic rate taxpayers would have had a fighting chance of only paying 18% on their gains, as he implied in the speech.

To say that the introduction of taper relief or indexation wasn't introduced because of "complexity" is simply another deception.

The reason why I was aware within minutes of the end of the statement that he had deceived over the suggestion that basic rate tax payers would "continue" to pay at 18% was because I'm a fairly cynical person and I couldn't work out the mechanics of how he was going to do it so referred within moments of release to the on-line red book. Even now most pundits and press haven't picked up on the deception and are still saying basic rate income tax payers will continue to pay tax on capital gains at 18%. The Sunday press was littered with the "misunderstanding.

In the Red Book, we discovered that somehow gains are going to be added to income and then annual income tax relief applied to all income, annual income tax allowances applied if appropriate, top-rate tax applied to income if over limits but only 28% applied to capital gain after an annual cgt allowance is applied if that person has exceeded basic income tax thresholds ..... to me this sounds complex.

To simply say - for example - all assets owned for ten years or more will have tax applied at the rate of 18% after annual cgt allowances have been applied doesn't seem to make the issue more complex .... in fact it sounds easier. The instruction then would be if you've owned the asset for more than 10 years, if gains exceed the annual capital allowance then deduct the annual capital allowance and apply 18% to the gain!

In any event, most people who have held second homes for a very long period - say people approaching or who have reached retirement - are unlikely to make a disposal now and realise the gain for a year or two to see if there are any tax changes in a year or two - unless they really have to. They may decide to rent it if they already haven't or just wait and see. So that group is going to pay less tax as a group rather than more because it is a voluntary tax.

He has produced a tax revenue loss regime for that group - which was avoidable - and at the same time penalised long term investors who he had deceived in the budget. Arguably, by retaining the current annual allowances he has perversely given an extra £10k income tax allowance disguised as a capital allowance to canny city folk. Over a 10 year period they have £100k's worth of extra annual "income" (capital cheat) reliefs compared to the pensioner who "did the right thing" and has no other gains - but hasn't sold their second home.

Shambolic, deceitful, counter productive and avoidable.

Stavros_3

To say I am more confused about the 18% and 28% than ever is an understatement. I am a basic rate taxpayer, therefore my CGT liability is 18% with regard to my investment portfolio. But if I exceed the tax threshold when I cash it in I am going to get clobbered with a 28% CGT bill. The chancellor has mislead the country

RayWolfe

.... and there's me thinking that the Tories were the best thing since sliced bread!

uk1

Stavros wrote: »

To say I am more confused about the 18% and 28% than ever is an understatement. I am a basic rate taxpayer, therefore my CGT liability is 18% with regard to my investment portfolio. But if I exceed the tax threshold when I cash it in I am going to get clobbered with a 28% CGT bill. The chancellor has mislead the country

To be fair ... and not to wish to make you more confused ... only the bit of gain that when added to your income takes you into higher income tax bands .... that bit ... after your annual capital gain allowances are taken away ... is subject to 28%. Easy really!:D

uk1

RayWolfe wrote: »

.... and there's me thinking that the Tories were the best thing since sliced bread!

Let's hope they don't decide to make more dough by taxing bread.;)

Hotscot

uk1 has done most of the hard work for the rest of us. Many thanks! I'm just not sure that it was deception, more like an almighty c++k-up that no-one has the guts to admit to. For those who have been on planet football for the past week or two, here's an extract from (what I and others here clearly think) is the unambiguous Chancellor's Statement (taken from Hansard & checked against delivery by me; italics & bold are mine):

"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."

After announcing details of on-going annual allowances & entrepreneurs' relief, he continued:

“I asked The Treasury to examine what would happen if we had increased the rate much beyond 28% and their dynamic analysis shows that this would have resulted in smaller total revenues. I’ve 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.

The changes I’ve made mean that the capital gains of the majority of taxpayers are protected, we have a top rate that is in line with our international competitors, we keep the system simple and easy for any taxpayer to understand and we reduce the incentives to convert income to capital gains. It is revealing that the great majority of the almost £1 billion of extra receipts we expect to see as a result of this change, will come from additional income tax payments and I believe this is the right way to reform the taxation of capital gains.”

How can the press and public not see what is wrong here? The arguments presented by uk1, me and others make it clear that the system actually being implemented for basic rate taxpayers is, to use the Chancellors' own expression, not fair by any reasonable standard. I suspect he knows this. But has he the strength to admit it? We'll see. The world is wakening up, albeit very slowly. It may not be over yet!

uk1

Hotscot wrote: »

uk1 has done most of the hard work for the rest of us. Many thanks! I'm just not sure that it was deception, more like an almighty c++k-up that no-one has the guts to admit to.

Thanks for your "thanks".

People do not like to think of politicions as dishonest - particularly after all that we've been through - so I understand your optimism. For what it's worth I am 100% certain that it was deception and I'll offer some reasons.

1. It isn't possible for someone who was a well educated and knowledgeable shadow chancellor along with the others around him not to understand what he was doing. I saw it immediately and he knows more about this than me. It was obvious if you simply read the Red Book.

2. Failing that the Red Book is written by civil servants who would have told him exactly the effects of his proposals would be. It is impossible for him not to have known.

3. I have given a cabinet minister who I have known well socially and through our common interests (and because he happens to be my MP) for over 20 years the opportunity to contradict my concern that this was deception and he has not done so. This is a person who I know would be uncomfortable with what has happened because he has a unique reputation for decency and integrity.

4. I have given another backbencher who is involved with the issue the opportunity - we've communicated several times over the last few days - to answer my concern about deception and he has not done so.

There are some other reasons ..... but frankly #1 and #2 should be enough!