CGT rises to 28%
Capital gains tax will jump from 18% to 28% for higher-rate taxpayers at midnight tonight.
The move is a blow to investors who were not expecting the change in CGT to come into effect until the next tax year. However, the increase is smaller than expected – it was feared that Chancellor George Osborne would hike it up to match the higher income tax levels of 40% or 50%.
In Osborne’s first Budget he declared that for basic-rate taxpayers (those earning less than £37,400 after deducting the income tax allowance) CGT would be frozen at 18% while the investment tax would rise to 28% in less than 12 hours’ time for higher-rate taxpayers.
According to Osborne, low and middle income savers who pay income tax at the basic rate make up over half of all capital gains taxpayers.
The annual exemption for CGT will remain at £10,100 this year and will continue to rise with inflation in future years.
Osborne called the current regime of having a gap of up to 32% between CGT and the highest rate of income tax “chaotic” and said it costs taxpayers more than £1 billion a year.
“It is therefore right, as set out in the coalition agreement, that CGT should increase in order to help create a fairer tax system,” he said.
Osborne stressed that he had listened to the investment community’s views and that his announcement today balanced “fairness, simplicity and competitiveness”.
In a move he claimed would promote innovation in the UK, the 10% rate for entrepreneurs, which currently applies to the first £2 million of qualifying gains made over a lifetime, will be extended to the first £5 million of lifetime gains.
The chancellor revealed that he had considered increasing the rate beyond 28% but the Treasury’s analysis showed that it would have resulted in smaller total revenues. He had also toyed with the idea of introducing tapers or indexation allowances, but concluded that it would have made the system too complex.
Lee Smythe, a partner at stockbrokers Killik & Co, says the announcement is a “good result” for investors. “The 28% rate is still lower than the income tax rates for higher earners. And the annual allowance has remained intact.
“It’s sensible, simple and fair. It was ridiculous before how a millionaire and a non-earner could pay the same rate of CGT.”
He says it won’t affect investors too much as they were expecting a rise in CGT anyway, however, certain tax deferral investments such as offshore investment bonds might become temporarily more popular for those wanting to avoid the 28% CGT rate.
Financial advisers were also supportive of the government’s decision not to raise CGT to 30% or 50%.
Patrick Connolly, spokesperson for AWD Chase de Vere, says: “Maintaining the CGT allowance means the vast majority of savers, once they have utilised their ISA and pension allowances, will not need to pay CGT. This will mean that people are not discouraged from saving for their futures.”
However, he disagreed with changing the tax rate at midnight, part way through the tax year.
‘This provides increased complications for individuals. A better approach would have been to delay implementing this change until April 2011,’ he says.
Estate agents said the increase in CGT could have a small negative impact on the housing market.
‘Potential buy-to-let landlords could be discouraged from investing, which will impact the market in the long term,’ comments Alison Beech, business relationship director at Spicerhaart.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
The practice of locating your financial affairs (banking, savings, investments) in a country other than the one you’re a citizen of, usually a low-tax jurisdiction. The appeal of offshore is it offers the potential for tax efficiency, the convenience of easy international access and a safe haven for your money. However, offshore is governed by complex, ever-changing rules (such as 2005’s European Union Savings Directive) and, as such, is the exclusive province of the wealthy and high-net-worth individuals.
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).
Everything you own: all your assets (property, cars, investments, savings, insurance payouts, artwork, furniture etc) minus any liabilities (debts, current bills, payments still owed on assets like cars and houses, credit card balances and other outstanding loans). When you’re alive this is called your wealth; when you’re dead, it becomes your estate.
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.
The catch-all term applied to investors who buy properties with the sole intention of letting them to tenants rather than living in them themselves, with the proceeds from the let usually used for the repayment of the mortgage. Buy-to-let investors have to take out specialised mortgages that carry higher interest rates and require a much bigger deposit than a standard mortgage. Other expenditure can include legal fees, income tax (on the rental profits you make), capital gains tax (if you sell the property) and “void” periods when the property is unlet.
A type of derivative often lumped together with options, but slightly different. The original derivative was a future used by farmers to set the price of their produce in advance before they sowed the seeds so that after the harvest, crops would be sold at the pre-agreed price no matter what the movements of the market. So a future is a contract to buy or sell a fixed quantity of a particular commodity, currency or security (share, bond) for delivery at a fixed date in the future for a fixed price. At the end of a futures contract, the holder is obliged to pay or receive the difference between the price set in the contract and the market price on the expiry date, which can generate massive profits or vast losses.