LibDems plan to abolish CGT tax-free allowance

Nick Clegg LibDem Rally 2012 Sep 480

The Liberal Democrats are set to propose the effective abolition of the tax-free allowance for capital gains by combining it with the income tax personal allowance.

In its taxation policy consultation, published this week ahead of its spring conference, the Lib Dems say the measure would raise £2.6bn for the public purse.

Those paying capital gains tax currently have the first £10,600 tax-free, while income tax has an £8,105 allowance. The LibDems are likely to propose a £12,500 personal allowance in their next manifesto.

The paper says the move is deigned to stop some people shifting their earnings between income and capital gains.

Association of Chartered Certified Accountants head of taxation Chas Roy-Chowdhury says: “What the LibDems are really trying to do is abolish the capital gains allowance through a sleight of hand which is grossly unfair.

“They should be clean about it. It is not the right approach as we have too much complexity and politics going into tax policy as it is.”

Hargreaves Lansdown head of advice Danny Cox says: “The LibDems are effectively wiping out the capital gains allowance as most people’s incomes will be in excess of a combined personal allowance.

“It is a one-size-fits-all approach to tax policy, using sledgehammer to crack a nut by tackling a few minor situations. There are not many people taking huge parts of their earnings in capital gains.”

The policy paper also wants capital gains to be levied on the sale of inherited property, which is currently exempt.

It calls for a further radical overhaul of inheritance tax by taxing the recipients of inheritance based on their income rather than the value of the bequeathed wealth. A similar system currently operates in other countries such as Ireland.

The paper reiterates LibDem policy that gifts should be made 15 years before death to be IHT free, more than doubling the current level of seven.

The wide-ranging consultation also targets pension tax relief with a focus on reducing the 25 per cent tax-free lump sum pensioners can withdraw from their pot when they retire.

It proposes cutting the annual pension tax relief further from £40,000 to £30,000 just weeks after it was cut from £50,000 in the December autumn statement.

The Lib Dems also want to see the lifetime allowance cut back from £1.25m to £1m, after it fell from £1.5m in the autumn statement.

The have also proposed a mansion “super tax” which would see their plans to charge a 1 per cent levy on homes worth over £2m extended to cover property portfolios including buy-to-let and second homes where the combined value of the portfolio totals £2m or more. The Lib Dems say under the proposals retired homeowners would be able to defer the mansion tax until death and pay it as part of their estate, to reflect those whose homes are worth more than £2m now but were originally bought for a much lower price.