Last October Alistair Darling came out with new and radical proposals for the taxing of capital gains (‘CGT’). Before 5 April 2008, higher rate taxpayers paid 40% CGT (the first £9,200 of gains being exempt), but the Chancellor planned to introduce an 18% flat rate from 6 April 2008. However, following an intense period of lobbying and acrimonious press comment he was forced to announce a partial climb down.
The reason so many people were so incensed was that taxpayers previously benefited from ‘taper relief', which meant that if you had held an asset for a certain period of time you would pay a lower rate of CGT. In simple terms, the longer you owned the asset the lower the rate of CGT. Mr Darling's original proposal was to abolish taper relief.
The Chancellor said that while he had listened to criticism of the proposals from business groups, he still intended to press ahead with the abolition of taper relief and the introduction of a new flat rate of CGT of 18%.
This would have been particularly harsh on those individuals who hold assets, which qualify for ‘business property relief.' Under the pre 5 April 2008 regime, owners of businesses, employees who invest in the company they work for and some others including, crucially, owners of qualifying AIM shares and shares in unlisted companies, could, once they had owned the asset for at least two years, legitimately pay just 10% CGT. Unfortunately the partial climb down will only be of benefit to some of these people.
The most contentious and frankly surprising aspect of the new regime is that it doesn't help private investors who hold qualifying AIM-listed shares. Before 5 April, thanks to business property relief, they only paid 10% CGT once they had held their shares for two years. From 6 April 2008 they will be paying 18% tax on their gains - an 80% tax hike! Hardly the way to promote investment in small businesses, which was the original purpose of the exceptionally low rate of CGT.
So who will benefit from the Chancellor’s climb down? Very few people I suspect. Anyone who owns a minimum 5% stake in a trading business and is an employee, company director or ‘other officer' of the company will qualify for the new relief. The lucky few in this category will only be taxed at 10% on the first £1m of gains. Any further gains will be taxed at 18%. £1m is a ‘lifetime limit' so once the first million has been ‘gained’, 18% CGT will apply ever after, subject of course to any future budget changes.
Tony Ahearne, Director, Moneyspider Limited.
Tony has been an Independent Financial Advisor for over 30 years. (The above article is based on the author’s understanding of the new rules and investors are advised to take their own professional advice.)
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