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Coalition must listen on CGT
At least insurers will be raising a glass or two to an increase in capital gains tax. The industry was in uproar two years ago when, without warning, Alistair Darling cut the rate of CGT from 40 to a flat rate of 18 per cent.
One senior insurance insider at the time called it “a cock-up’”.
It put investment bonds at a disadvantage to unit trusts because of the way tax was treated.
The insurance industry protested but did not capitulate, although companies such as Standard Life did notice a fall in sales.
The coalition’s plan to raise CGT in the emergency Budget has not gone down well within the wider investment community. Stockbrokers and investment managers are up in arms over the proposed hike, which could see some taxpayers pay a rate as high as 50 per cent, and are worried investors will be making hasty decisions based on tax, rather than on the case for investing.
I can understand their gripe. It is a hefty rise to inflict in one fell swoop and it has left many investors, from buy-to-let landlords to shareholders, wondering whether they should sell their assets before the Budget to avoid any potential increase.
If they wait until after June 22, their tax bill could be double what they would pay today. The Telegraph has received hundreds of letters from miffed readers, many just ordinary people who fear they will be unfairly penalised, rather than the get-rich-quick merchants the tax rise intends to hit.
The problem is that the coalition went ahead and announced its plans to snare “non-business assets” but it was then scant on detail on who actually would be affected. It is this lack of detail that has caused investors to worry.
Reports suggest it may water down its intentions following the backlash. Some say older people could be excused the tax hike - if that is the case, you just hope they have not made any rash decisions in the meantime.
If the coalition has any sense it will listen to the calls for inflationary growth to be taken into account (via indexation) or for some tax relief to ensure long-term investors are not punished unfairly. The number-crunchers have calculated that tax bills will more than double if no indexation is applied.
Taper relief may have been complicated in the past, but it did work.
You also hope that the new Government has done its maths.
CGT currently produces around £2bn of revenue - not a huge money-spinner for the Government in the grand scheme of things.
George Osborne might want to pick up the phone and have a chat with Peter Hargreaves. The vocal founder of Hargreaves Lansdown recently told me of his concerns by recalling the tale of a client who did not want to pay tax on his gains when the rate of CGT was a hefty 30 per cent.
He said: “Our client had a big holding of around £100,000 but he bought the shares for next to nothing so he was faced with a £30,000 tax bill. He didn’t want to pay it so he held on but the company went bust. He ended up with nothing and so did the Treasury.
When tax is punitive people can be bloody minded and they are not prepared to make investment decisions.”
The moral of the tale, says Hargreaves, is the Treasury may get less than it bargained for by putting CGT up.
Paul Farrow is personal finance editor at the Telegraph Media Group
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