New government set to raise CGT

12 May 2010

An emergency budget is expected within the next 50 days after David Cameron was officially announced the new prime minister - but leaks suggest capital gains tax is set to rise.

The Conservative leader had an anxious five days waiting to see if his party could reach an agreement with the Liberal Democrats.

Speaking outside 10 Downing Street, Cameron promised a “proper and full coalition” that will tackle the country’s “really big challenges.”

The Prime Minister admitted it would be a challenge, but says himself and Clegg would put aside their political differences for the national interest.

“This is going to be hard and difficult work. A coalition will throw up all sorts of challenges, but I believe together we can provide that strong and stable government that our country needs based on those values, rebuilding family, rebuilding community, above all rebuilding responsibility in our country.”

Experts are welcoming the coalition at least in the short term. Darius McDermott, managing director of Chelsea Financial Services cautiously welcomes the move.

"I think a short-term Tory-Liberal Democrat government lasting between six and 12 months could come up with a credible cost-cutting plan. Of course, the stumbling block to such a coalition is electoral reform.”

Clegg will become deputy prime minister, with Vince Cable taking up a position to oversee banking sector reforms. George Osborne has been appointed as the new Chancellor of the Exchequer.

An emergency budget is expected within 50 days, in an attempt to tackle the UK’s £165 billion fiscal deficit, which according to the European Commission forecast, is set to be the largest deficit across the continent by the end of 2010.

The coalition’s first priority is the Tories’ much touted £6 billion worth of “efficiency savings”.

Azad Zangana, Schroders European Economist, says these cuts will dampen economic growth.

However, he says: “The UK recovery appears to be gathering pace having disappointed many analysts so far. The manufacturing sector seems finally to be benefiting from the weaknesses in Sterling, as official numbers yesterday showed manufacturing output up 3.3% in March compared to a year earlier.”

The markets have responded, in general, positively this morning. Sterling is trading higher against the US Dollar and has reached an 11–month high against the troubled euro.

However, Simon Denham, head of Capital Spreads, thinks it is too early to predict if the stability will last.

“Many investors are just biding their time before diving back in too fast as the sovereign debt situation throughout Europe still looks incredibly unstable,” he says.

What will the new Budget hold?

In a bid to reduce income tax for low earners, capital gains tax is set to rise on ‘non–business’ assets such as shares and homes. From April 2011 there could be a significant increase on sale of these assets from 18% to 40% or even 50%.

Stuart Law, chief executive of property investment company Assetz, is worried though that the proposed increase will have a negative impact on the property market.

“Continued stability of the current 18% tax rate is imperative in driving investor activity and securing a full recovery for the property market.

Any exorbitant increase on the tax rate, with current figures suggesting this could reach as high as 50%, will only slow economic growth and scupper the government’s promise to revitalise the markets.”

It’s also likely that VAT will be raised from 17.5% to 19% in January next year, raising approximately £8 billion.

The two parties have reached a conclusion on next year’s planned national insurance rises with the proposed 1% increase going ahead for employees but part of the employer’s rise will be cut to try and encourage companies to hire new workers.

The Liberal Democrat’s proposed income tax threshold increase to £10,000 will take a back seat for now, but will be discussed later by the coalition. The party has also agreed to drop its mansion tax proposals, while the Conservatives have shelved their pledge to raise the inheritance tax threshold to £1 million.

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