Keep CGT simple

18 June 2010 8:00 am

Much against my expectations, the Lib-Dem/Conserv-ative coalition Government has been surprisingly successful.

Not only do they seem to be working well together, they have also made some sensible decisions, among them the abolition of the child trust fund, which I have always considered an unsustainable extravagance.

The partnership may well still crash and burn and, from a financial planning perspective, all eyes will be on the emergency Budget and in particular what they do about capital gains tax.

The threat is that we see a rise in the CGT rate for gains on non-business assets to 40 per cent, complex taper relief rules and possible cuts in the annual CGT allowance - a policy cocktail that will be sour to the taste.

At the same time, there have been strong hints that concessions will be given to entrepreneurs and others to avoid a powerful disincentive being established for individuals to invest capital in businesses.

In the face of a seemingly inevitable rise in the CGT rate, Tory MP John Redwood and others have been arguing for the reintroduction of taper relief to offset the impact for the individual.

This starts introducing levels of complexity which we had hoped had been put behind us.

One of the great benefits of A-Day in 2006,was it made pensions simple and easy to understand. If Governments want taxes to work, they should apply the same principle.

The Government has to raise taxes to try to pay off the debt mountain. David Cameron has talked about preparing for tough action.

My fear for CGT is we will go back to horrendously complex systems of tapering, making it difficult for people to understand the tax they pay.

Furthermore, the more complicated the raising of taxes becomes, the more complex the infrastructure and resources needed to maintain and police it become also and the higher the costs. This is not just for HMRC but for individuals and companies too, who must seek advice.

If you weigh the amount of tax raised against the cost of collection, the cost to the individual in having to seek advice and the impact of high tax costs on deterring busin-esses and investment into the UK, you have to question the benefit of tampering with CGT.

Raising the CGT rate will be a popular move. We need those putting the policy together to consider two things. First, the consequences of a hike in the rate and/or a cut in the CGT allowance on incentives to save and invest in business. Second, that whatever policy is brought in it is kept simple and easy for the public to understand.

Carl Melvin is managing director of Affluent Financial Planning

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