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PBR: “CGT is a tax increase by another name”

Chartered accountant MacIntyre Hudson says Chancellor Alistair Darling’s announcement that capital gains tax will be set at a flat rate of 18 per cent is “a tax increase by another name”.

MacIntyre Hudson tax principal Nigel May says taxpayers who own businesses will be negatively impacted by the changes.

May says: “By abolishing indexation allowance as well as taper relief, taxpayers will lose the benefit of indexation of their base cost between 1982 and 1998, a period during which the RPI more than doubled. 

“They will not only pay an increased tax rate of 18 per cent, but where the asset was owned before 1998 will pay this on a much larger gain, much of which simply represents inflation. 

“Taper relief itself replaced retirement relief, under which gains of up to £250,000 could be exempted on retirement.  These will now face a tax charge of 18 per cent. 

May says this is likely to lead to a lot of transactions before April 2008 for those with assets held since 1982 who will face both an increased tax charge and a halving of their base cost for CGT purposes under the new regime.

May says: “The Treasury estimates the reform will yield £900m a year by 2010-11, allowing for the fact that CGT is paid in arrears.  Alistair Darling has introduced a tax increase by another name.” 

New Star economist Simon Ward says: “The capital gains tax changes represent a welcome simplification although there is a risk that some private equity activity will now shift offshore.”

Deloitte private client services director Patricia Mock says: “On the change in rates, there will be winners and losers. The flat rate of 18 per cent replaces the gradual reduction of the gain through taper relief. General investors in shares and those with buy-to-let or second properties, who achieve a minimum rate of 24 per cent after 10 years ownership will find their position improved, although accumulated indexation allowance will no longer be available (which applied to assets owned before 1998).

“There will be no holding period required to benefit from this new rate. However, entrepreneurs and taxpayers who hold shares in their employer will find a 10 per cent rate replaced by one of 18 per cent. The changes are bound to mean a flurry of sales in the period up to 5 April 2008, as people make sales to lock into current rates if this is to their advantage.”

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