CGT reforms have increased tax burden

Tax cuts

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.”

More reforms?

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."