Will the CGT grab punish small investors?
There's only one thing worse than paying tax and that's paying it twice.
Those 'lucky' or savvy enough to have inherited or purchased assets or invested their earnings are in turmoil as the nascent coalition government warms up a capital gains tax-grab.
Currently, capital gains tax (CGT) is payable at a fixed rate of 18%. But the government plans to bring this in line with an individual's top rate of income tax. This means that 18% will rise to 20% for basic-rate taxpayers and 40% and 50% for higher and top-rate taxpayers respectively.
Alas, as these changes are being driven by business secretary Vince Cable, it's not just the rate that will bite, but the point at which CGT kicks in. Currently, the threshold is £10,100 before any CGT is due. The Liberal Democrat manifesto said the allowance or starting point for this tax should be cut to £2,000.
We can expect full details on 22nd when the emergency Budget takes place.
Of course, CGT was charged at 40% as recently as 2008. However, investors were also given substantial indexation relief or taper relief from the tax if they held onto assets over the long term, as a disincentive to those trying to make a fast buck.
As no mention has been made of any relief, the combination of this, along with increased rates and lower thresholds is a worry for many. But just how many?
The most recent figures available from HMRC show that 130,000 people paid CGT in the 2007/8 year. Just over half of these were being taxed on assets worth less than £25,000. It's a tiny percentage of the population, but economists at Deloitte say that a lower threshold would drag around one million people a year into CGT.
Fund manager Fidelity agrees, saying CGT will hit harder and earlier for average savers.
Paul Kennedy, the head of tax planning at Fidelity, said: "The forthcoming increases in the rate of CGT have been subject to much attention in relation to wealthy individuals. However, it should be remembered that the allowance is relevant to all investors, not just those on higher incomes.
"Our analysis shows that decreasing the tax-free allowance will result in millions of average long-term savers being dragged into a net that many believed was being set only for the rich. Such a change is likely to damage particularly older people who have saved prudently to supplement their income in retirement and gradually sell down their holdings.
He added: "The CGT allowance must be maintained at a level where it neither produces disproportionate burden on the modest investor nor distorts or compromises sensible long-term investment plans."
As a revenue-generating scheme, the changes are questionable. The Adam Smith Institute has calculated that every time the US Treasury increased CGT it has seen its revenues actually fall as people hold onto their assets in the hope that the tax will drop.
In the UK, Treasury coffers were filled to the tune of £7.85 billion last year but many factors - including the state of the economy, share and property prices - can affect the amount of revenue delivered by CGT in any particular year. The Lib Dems in their manifesto calculated the changes would raise an extra £1.92 billion.
In a BBC Radio 4 interview, David Cameron said: "We will listen to all the arguments. The process is clear. The decision will be announced in the Budget."
John Mulligan, managing director of the Investors' Association, believes the changes "...would imply that a genuine saver selling shares or a second home that had been held for maybe decades would have their nominal gain taxed at the same rate as a gain made by a day trader who had only held an asset for days or even hours".
He addes: "The proposals are not fair and are not in the long-term interests of the vast majority of workers, savers, investors and pensioners and indeed the wider economy."
An individual employed by an institution to manage an investment fund (unit trust, investment trust, pension fund or hedge fund) to meet pre-determined objectives (usually to generate capital growth or maximise income) in prescribed geographic areas or investment sectors (such as UK smaller companies, technology or commodities). The manager also carries the responsibility for general fund supervision, as well as monitoring the daily trading activity and also developing investment strategies to manage the risk profile of the fund.
Capital gains tax
If you buy an asset – shares, a second home, arts and antiques – and then sell it at a later date and make a profit, that profit could be subject to CGT. You don’t pay CGT on selling your main home (which is why MPs “flipped” theirs so regularly) or any securities sheltered in an ISA. Individuals get an annual CGT allowance (£10,600 in 2010/2011) but if you have substantial assets it’s worth paying an accountant to sort it for you.