CGT reforms have increased tax burden
Capital gains tax (CGT) reforms introduced in April have led to a 35% jump in the number of people being hit by this levy.
The savings bank Skandia, which derived the figure from government statistics, says it presents evidence that CGT reforms have failed to reduce the tax burden in the UK, and are just another stealth tax brought in by the backdoor.
April’s reforms saw an 18% flat-rate of CGT introduced, plus the abolition of tape and indexation relief. The exemption was also raised to £9,600.
In 2007, 260,000 people paid CGT but this is expected to jump to 350,000 people by the end of 2008. So although some people may pay less CGT thanks to the reforms, a greater number of people are being hit by the levy.
Skandia says the winners from the reforms are likely to be higher rate taxpayers, who previously had to pay 40% on their capital gains, with those in basic-rate bands now being hit harder. This is down to the abolition of indexation and taper relief, which effectively reduced the gain investors made depending on how long they had held the asset.
For example, prior to April 2008, someone holding assets for 10 years or more would only have paid CGT on 60% of their gain, effectively reducing the rate of tax from 40% to 24% or 20% to 12% depending on their tax band.
Colin Jelley, head of tax and financial planning at Skandia, says: “Despite the headline rate reduction the government expects the Exchequer yield from CGT to increase. Many investors will find that whereas previously they would have been liable to pay 40% of nothing, now they are liable to pay 18% of something.
“In other words, their tax liability has gone up.”
Earlier this month, the Association of Private Client Investment Managers and Stockbrokers (APCIMS) made a formal submission to the Treasury for the rules surrounding CGT in the autumn’s pre-Budget.
The association is concerned that long-term investors are being penalised by April’s reforms. It wants to see new rules introduced for assets held prior to 1998.
As long-term shareholders can no longer benefit from indexation relief, which reduced their gain by the annual rate of inflation for the years between 1982 and 1998, many investors are being penalised, it says.
David Bennett, the chief executive of ACPIMS, says: "This change would also be relatively small in terms of revenue loss to the government. Importantly it would show that the government is not penalising long-term shareholders but is recognising the importance of this long-term investment."
The general term for the rate of income from an investment expressed as an annual percentage and based on its current market value. For example, if a corporate bond or gilt originally sold at £100 par value with a coupon of 10% is bought for £100 then the coupon and the yield are the same at 10%, or £10. But if an investor buys the bond for £125, its coupon is still 10% (or £10) and the investor receives £10 but as the investor bought the bond for £125 (not £100) the yield on the investment is 8%.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
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.