Capital Gains Tax after the Pre-Budget Report

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Alastair Darling announced in the Pre-Budget Report:

a major reform of capital gains tax, introducing a single rate of 18 per cent from April 2008, ensuring a more sustainable system that is straightforward for taxpayers and internationally competitive.

And all hell let loose. Everyone from the Institute of Directors to left wing Labour MP George Mudie is unhappy about the outcome. As George Mudie said to Treasury officials at the Treasury Select Committee:

You never bothered to ask what [businesses] would think of the withdrawal of taper relief . . . Do you not see that you have handed industry something to hit you over the head with? To deal with one problem you have actually created some real anger and real problems for people running small businesses.

I was challenged by the TUC last week as to what I would do to amend the proposal Alastair Darling made in the Pre-Budget Report to make it more palatable. The result is a paper called UK Capital Gains Tax: Where after 18%%?

Unlike others who have protested but not made suggestion as to where we might go from here I make suggestion for positive changes. These are that:

1. All gains on disposal of business assets should be charged at 18% as proposed in the PBR but with a 1% reduction in this charge for every year the asset has been held until a charge of 10% is reached.

2. Shares held under SAYE and other share incentive schemes open to all employees of a company should be considered business assets for CGT purposes, so preserving a valuable benefit for these incentives.

3. All gains on the disposal of non-business assets should be charged at 18% as proposed in the PBR but with the refinement that any part of the gain that would, if it had been liable to income tax would have caused the taxpayer to pay income tax at above the basic rate will instead be charged at 40% subject to a 2% reduction on the 40% rate for each year that an asset is held until a rate of 18% is charged on the gain in its entirety.

4. The arrangement with the British Venture Capital Association under which returns to the carried interests of private equity partners are treated as capital gains for tax purposes should continue, but only in respect of those funds that restrict their total investment in any one company to £5 million or below. This will ensure that this beneficial tax arrangement only applies to genuine venture and start-up capital investments where the risk involved justifies this treatment. Carried interest on larger investments should be treated as income for tax purposes.

5. To prevent abuse of these measures, we suggest that any scheme which is designed to convert income into a capital gain purely for the purpose of avoiding tax would be declared null and void.

This achieves these objectives:

1. The rate of 18% is used;

2. The private equity problem is tackled;

3. All-employee share schemes keep tax favour;

4. Enterprise is encouraged;

5. Longevity of ownership is rewarded;

6. Speculation is discouraged both by the tax rates and by an anti-avoidance measure;

I believe this provides a viable platform for reform to the CGT proposals, and if the definition of business assets is revised as I suggest in the attached paper then I believe that real progress could be made in this area.

I hope so: like so many I was deeply disappointed by the Chancellor's proposals for CGT reform and believe there is scope for considerable improvement in them.