Capital Gains Tax Reform: Simplification or another Stealth Tax?

On 9 October 2007, the new Chancellor of the Exchequer, Alistair Darling, issued his first pre Budget report. Included within his report was a proposal radically changing the current Capital Gains Tax legislation, which has received significant press coverage. The proposed changes will see the removal of several long standing principles of Capital Gains Tax and would introduce a flat rate to all gains made by individuals, Trustees and personal representatives, with effect from 6 April 2008. The changes do not affect Capital Gains calculations for companies.

 

The major changes to the Capital Gains Tax regime include the removal of indexation relief for assets, which was effectively a mechanism for increasing the base cost of assets held in line with inflation. The other change is the abolition of taper relief, which was introduced in April 1998. Taper relief had two rates dependent on whether the asset was a business asset or a non business asset. The taper relief rates for business assets were far more favourable for business assets, resulting in an effective tax rate of 10% on a gain made by a higher rate tax payer who had held assets for at least two years.

 

The main aim behind introducing this relief was to promote investment in business and an entrepreneurial culture within the UK. It was aimed at giving favourable tax rates for long term investments in businesses and business assets.

 

The new proposed flat rate that has been cited by Chancellor Darling in his pre Budget report was 18%, which for those holding business assets for more than two years will effectively result in an 80% increase in the tax that would have otherwise been paid.

 

As you can imagine, small business owners and entrepreneurs, together with all the main business institutes are outraged by this proposal. It appears to go against the grain of the Government’s underlying reasons for introducing the relief in the first place.

 

If you would like to see how Chancery can assist you or your business in any of the above matters relating to Capital Gains, please do not hesitate to contact Mark Stemp or Delyth Barnett on 01908 699600.