Why a British Capital Gains Tax increase is a bad idea

The increase, estimated to be at around 40 percent would be an erosion of value and a wealth tax in disguise. Here's some advice about what you should do before the increase.

By , Guest blogger

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    A union flag is seen near the Mont Orgueil Castle at Gorey Harbour in Jersey in this February 2008 file photo. Britain's new government is likely to increase the Capital Gains Tax to 40 percent.
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The news is that the rate of Capital Gains Tax is to be increased to around 40%. My hope is that the CGT allowance of £10,100 will remain, but I note that the Liberal Democrats have suggested reducing this to £1,000.

The previous Labour government sought to simplify CGT by removing taper relief and indexation. To compensate for the loss of these reliefs, the rate of CGT was reduced to 18%. It would be most unfair to now increase the rate of CGT without either rebasing the book costs for long held assets from 1982 values or reintroducing indexation relief to compensate for the effects of inflation. Otherwise, if a share price simply rises in line with inflation, the value remains the same, so on disposal the investor is taxed not on the gain but on the increase in price. Such tax is therefore an erosion of value and a wealth tax in disguise.

The timing of the proposed change remains uncertain. It is possible that the changes could start immediately, or they could be backdated to the start of this financial year, or they could take effect from 6th April 2011. Given the need for speed to address the country's economic problems, I expect action sooner rather than later.

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Investors planning to make disposals would be wise to do so before the emergency budget, in case the proposed increase in CGT takes immediate effect. Remember that the same shares bought back within a month match against the sale leaving the original holding undisturbed. You could hedge your bets by selling just before the budget, see what happens and then decide whether to unwind your position by buying back within a month.

Given the Tory commitment to reward marriage I think it unlikely that any action will be taken to remove the free transfer of assets between spouses. You should ensure that assets are held by the partner on the lower tax rate, and make transfers accordingly. Similarly, make transfers so sales are made in the right name to maximise the use of CGT allowances.

Three other points:

  • Capital gains arising within ISAs are free from CGT and this has just become significantly more valuable. It is therefore even more important that you utilise your ISA allowances.
  • If gains are realised on sales to fund a SIPP contribution, the income tax relief on the contribution can offset the CGT arising.
  • Capital gains arising from VCT investment are exempt from CGT so I suspect that there may be a revival of interest in this area.

Fred Robinson is a Private Client Partner at Killik & Co.

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