I am all for simplification, but while the current capital gains tax rules are simple, they are not fair, and they incentivise the wrong behaviours.
Indexation and taper relief have their issues, but they do reward individuals for saving or investing for the longer term, with the effective rate of tax being reduced with time. The current capital gains tax rules are effectively a tax on inflation, and you are better turning over an asset quickly (that is, speculating) than you are holding it for the longer term (investing).
So it is with some trepidation that I welcome the changes to CGT, which will see the headline rate reduce from 28 per cent to 20 per cent, and the rate for basic rate taxpayers move from 18 per cent to 10 per cent. The existing tax rates will be maintained for residential investment properties.
This will significantly benefit clients who own small proportions of very valuable unquoted companies.
Failing to qualify for entrepreneur’s relief meant they saw a cliff edge where often sizable gains for non-executive directorships would be taxed at 28 per cent.
But if they held a few fractions of a percentage more they would qualify for 10 per cent taxation instead. This is even more painful if dilution from external investors had changed their ownership.
For those of more modest means, the Isa allowance increase to £20,000 is also welcome. This means a married couple can squirrel away £40,000 from tax, in addition to the generous interest allowances that apply to cash and interest-bearing collective investments.
A more tangential improvement comes in the form of corporation tax reductions. While I would question the value of tax reduction that is timed for the next Parliament, the same gross profit will see more distributable dividends for both owner-managed businesses and investors in UK equities. The reduction from 20 per cent to 17 per cent corporation tax will see dividends rise about 4 per cent on a like-for-like basis.
The introduction of the Lifetime Isa looks like pensions reform ‘beta edition’, with the full changes to come at some point over the next 18 months. I suspect this is why salary sacrifice of pensions looks safe, despite being highlighted as a “concern” in the last four Budgets and Autumn Statements. The Treasury is at pain to stress, “the Government’s intention is pension saving… should continue to benefit from income tax and national insurance contributions relief”.
The changes to funding for advice are not particularly exciting – savers will be allowed to withdraw up to £500 tax-free from their defined contribution scheme to redeem against the cost of advice.
That said, if early access to pensions supports more individuals engaging an adviser earlier, that must be positive.
Overall this was a good Budget, and comprehensive tax planning will be more important than ever.
Alistair Cunningham is director at Wingate Financial Planning