Apart from the Welfare to Work proposals, the most significant structural reform in the Budget was that proposed for capital gains tax.
The results go further than some believed the Chancellor would go in his quest to encourage long-termism. As well as the significant changes proposed to the taxation of gains from both business and non-business assets, there are also many proposals for simplification of the tax and closing what are perceived by the Government as avoidance loopholes. Far too many, in fact, to cover in this piece.
The most fundamental change proposed is the introduction of a form of taper relief with effect from April 6, 1998.
Greater relief is given to gains made on the disposal of business assets. Broadly speaking, most substantial (5 per cent or more ) shareholdings in trading companies, interests in trading partnerships and assets used for the purposes of an individual's trade or employment will be qualifying. These will qualify for a 75 per cent reduction in the gain chargeable after 10 years, with tapering on the gain becoming available after one year.
For business owners selling their business after 10 years, an effective rate of tax of 10 per cent would be secured, assuming the disposer is a 40 per cent taxpayer.
For non-business assets such as investments, the qualifying holding period is 10 years but the tapering is less beneficial, with an ultimate reduction of 40 per cent being secured. Thus, only 60 of the gain will be assessable and, at 40 per cent tax rates, this will mean that the effective rate will be 24 per cent.
As a quid pro quo, the Chancellor proposes phasing out retirement relief and withdrawing indexation relief for periods after April 6, 1998. Of course, the extent to which the taper relief outweighs the loss of indexation and, where relevant, retirement relief will depend on the balance between inflation and asset growth.
These changes need to be fully considered by investors, business owners and advisers.
For pensions advisers, the validity of the argument "my business is my pension" as a reason why not to fund for retirement may appear to be increased by this latest proposal.