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.