Capital Gains tax changes from Budget Day?

The Times for Monday 17 May carried a story that the increase in the rate of capital gains tax anticipated in the Budget on 22 June could be implemented as early as Budget Day.

This would indeed be a feat to pull off, but one which I suspect is beyond our new Chancellor, as the rate of CGT is set for a tax year at a time. Changing the applicable rate mid year would cause all sorts of problems, with extra rules needed to create separate chargeable periods in each portion of the tax year, as if the year were in fact two fiscal years. This would then present major programming issues for HMRC, as the Self Assessment online system needs to be updated to cope with capital gains tax computations for taxpayers filing online. The treatment of losses in year and brought forwards would need to be legislated for and the whole issue would be a complex mess.

Given that the proposal seeks to tax gains at similar rates to income, or rates close to this it is possible that gains pre Budget could be taxed at the current rate of 18%, with gains after the Budget being taxed under completely separate rules reflecting income tax rates – indeed gains could simply be added to the income for the year to compute the tax liability. However, a further complication might be an individual who has high income at the start of the tax year but very low income for the balance of the tax year. Which rate would apply to the gains – that applying to the income for the year as a whole or that applying to the income level when the gain was incurred? I suspect that this would be glossed over in any detailed proposals.

There is another possibility which would be relatively simple to implement for the current year, and that is to include post Budget gains as a multiple – so all gains arising on or after 22 June might be taxed as if they were 2 x the actual gain. This would increase CGT on those gains to 36% in a fairly simple way, to be followed by a rate which mimics income tax for the next tax year. Shouts of “legalised robbery” from the Daily Telegraph on Friday 14 May seemed to overlook that it is a very short time since capital gains were taxed at income tax rates – although of course the top rate of income tax has risen from 40% to 50% since then.

There is also gossip that the Lib Dems are keen to reduce the CGT annual exempt amount. Once again this is set for a tax year at a time, and it would be technically challenging to alter this mid year – but proposals to significantly reduce the exempt amount should not overlook the potential increase in those needing to make a self assessment return to report minor disposals of employee shares.

Advice for your clients
These proposals are sufficiently concrete in the coalition agreement as to be certain to arise. Therefore, any client contemplating a disposal of a non business asset would be wise to push ahead with the disposal as soon as possible – remembering that the date that contracts become unconditional is the date of the disposal for CGT purposes. A formal binding contract for sale with completion set slightly later and proceeds payable later still would be an effective way to crystallise disposals at the current rate of 18%.

As to disposals of business assets, the coalition agreement indicates that there would be “generous exemptions for entrepreneurial business activities”. This seems to be a clear steer that Entrepreneur’s relief would be suitably adjusted to retain an effective rate of 10%. It is possible that some refining of the definition of a qualifying asset may be implemented, but in the time available, this would not be a good use of time.

Comments
John Stokdyk's picture

Announcement predicted for CBI speech on 19th??

John Stokdyk | | Permalink

Over on Accountancy Age, Gavin Hinks is predicting that the Chancellor will announce the increase tomorrow evening at a speech to the CBI.

Far be it from me to question Gavin's sources, but in the past Treasury officials have always stonewalled me by saying they could never divulge any policy announcements until they were put before MPs. But I suppose we've got a dynamic new approach where policy statements can emerge in press conferences and public speeches.

The practical hurdles Rebecca has highlighted would exist whether Osborne announces his plans on 19 May or 22 June.

naomi2000's picture

Business assets

naomi2000 | | Permalink

I don't think we can assume that entrepreneur relief will be retained -taper relief could be reintroduced or we could even get a new relief to play with -particularly if the changes are put back to April 2011 .

If the change isn't introduced until 6 April 2011 , tax revenues might receive a temporary boost as people rush to beat the deadline.

However, I don't think arguments about practical difficulties or extra overtime for accountants are going to cut much ice with the treasury given the size of the deficit .

 

RebeccaBenneyworth's picture

Realistic

RebeccaBenneyworth | | Permalink

I do think it is unrealistic to create a set if rules which could run to 70 or 80 pages of legislation, and which would be practically well nigh impossible to implement for the SA computer system in the time available, and which would be effective for one year only, and have to be removed again for the following year. That's my judgement of what would be required to implement CGT change of rate mid year, because of the complexity of how to treat losses - at the moment CGT is charged on the net gains of the year, and this would have to be unravelled to change rate mid year. Mind you, there is always the possibility that CGT itself is abolished for non business assets and the net gains are charged to income tax - that would be simpler and could be done mid year in my view.

Yes, it is also possible to abandon ER and change all of that too but we're working on quite a short timeframe and given that we have existing definitions and an existing relief which does what the policy document states then my reckoning is that this would be retained. If the policy document stated something quich does not match ER then I would expect them to change it, but it sounds very similar to the current ER - change for change sake does not follow another commitment in the document - to simplify tax as far as possible. It's possible that the current definitions might be enhanced to provide for broader relief but ER is pretty generous as it is.

John Stokdyk's picture

Cashflow implications

John Stokdyk | | Permalink

In a response to our interview with ATT technical officer John Kimmer, AccountingWEB.co.uk member Normande argued that the cash flow implications might encourage the government to move on a mid-year CGT rate change in spite of the technical complications. Here's what they said:

"The CGT rise is supposed to partly fund the promised increase from April 2011 in the income tax personal allowance. Such an increase  will hit the Treasury coffers from  May 2011 when the first PAYE receipts arrive for 2011/12. If the CGT rate increase is deferred until  April 2011, the increased yield will not appear until 31 January 2013 - i.e. almost two years after the PAYE yield starts to drop.

"A change in the CGT rate from 22 June 2010 will at least have an effect on the yield from 31 January 2012 - still 8 months later than May 2011 but better than waiting until January 2013."

RebeccaBenneyworth's picture

Interesting

RebeccaBenneyworth | | Permalink

I'll admit that one should never say "never" but I still think the technical challenge posed by creating two fiscal years within one and the necessary additional legislation to deal with the treatment of losses in year (separately?) and brought forward, and the appropriate allocation of annual exemption makes a change on Budget day extermely unlikely, unless someone in the Treasury can come up with a neat technical solution. I chatted to a few well known faces about this and most seem to be of the same view as me. The cash flow implications are, of course an interesting challenge.

John Stokdyk's picture

Francesca Lagerberg: hold back increase until next year

John Stokdyk | | Permalink

According to Grant Thornton head of tax Francesca Capital Gains Tax changes will hold the most excitement in the 22 June Budget announcements – and not just because of the controversy surrounding the proposals in Westminster.

“CGT changes are really significant on how to plan for next year,” she told a seminar at the recent CCH user conference. “If [the rates] are going to be aligned with income tax, shifts into capital will be less advantageous.”

From the promises in the Liberal-Conservative coalition agreement, Lagerberg expects to see the CGT rate increase, but is in the dark with the rest of us on what the rate is likely to be, and how the government will go about implementing it.

“Maybe it will be 40%, but not on everything. They want to protect true business activity and may have less relief on non-business activity. What’s business or non-business will be absolutely vital. There will be support for entrepreneurial activity, if you are genuinely trading.”

According to Lagerberg, “The big issue is the starting date.” Two of the possible options are “rubbish”, she said, and one offers practical advantages.

The less popular options for tax advisers are to introduce the CGT rate increase either on 22 June, or back date it to the beginning of the 2010-11 tax year, 6 April. “They have the ability to backdate it, but it will be really bad to do that. It’s not a good thing to do when you have an aggressive upshoot.”

Doing something from 22 June is not a great option because it doesn’t give people time to plan, she argued. “It’s far more effective to change rates at the beginning of the tax year: HMRC struggles to cope with a split rate tax year and so do individuals.”

It also helps entrepreneurs if you give them time to plan, she continued: “Increasing the rates from April 2011 would give them an opportunity to capitalise gains and lots of money would come in, so they would be better off. It will be very, very useful if they wait.”

In the April 2011 scenario, clients would be able to get gains into the current tax year, or could put assets into a trust or pass them to another individual; or they could put in place deferred completion transactions where you do everything to sell an asset except complete. “This crystalises the gain, but Stamp Duty applies.”

Increased tax rates in the Budget also make some obscure but current schemes more attractive for tax planning, she added. It could be time to go back and revisit things such as: Employee Flexible Remuneration Benefit Schemes (EFURBs), Venture Capital Trusts (VCTs), and Employee Investment Schemes.

John Stokdyk's picture

A little more Westminster controversy

John Stokdyk | | Permalink

Political flak continues to surround the new government’s plans for CGT, with backbench Tories refusing to back down in their opposition to any increase.

The Adam Smith Institute fanned the flames on Thursday with a report estimating that increasing CGT on non-business assets such as shares or second homes could cost the economy as much as £4bn.

Business secretary Vince Cable responded in the Commons that increasing CGT would make the tax system fairer. He told MPs: “We are conscious of the impact of CGT on business. We want to make it very clear that any reforms will acknowledge the role of entrepreneurship and not damage it.”

Gina Dyer's picture

Cameron hints at CGT concession for savers

Gina Dyer | | Permalink

Prime minister David Cameron has given his strongest suggestion yet that concessions will be offered to savers against the planned capital gains tax increase.

The government is expected to increase CGT on non-business assets from 18% to 40% in the forthcoming Budget, a move designed to fund the Liberal Democrats’ policy of increasing the income tax threshold to aid low income families.

However, in an interview with the Sunday Times this week, Cameron said the government would aim to protect savers: “I totally understand the arguments. I did not come into politics to punish people who want to do the right thing and save”.

There has been widespread pressure from Conservative MPs including John Redwood and David Davis to offer taper relief to those who had saved over a number of years.

George Osborne is reported to be weighing up several opt-outs to the tax rise in his Budget.

There has been concern among Liberal Democrat MPs about the possibility of a ‘watered down’ CGT increase. Business secretary Vince Cable warned that the system might be exploited by wealthy individuals reclassifying income as capital gains.

 

John Stokdyk's picture

PKF's Philip Fisher in the 'wait til next year' camp

John Stokdyk | | Permalink

I had an interesting pre-emergency Budget chat with Philip Fisher, head of Employment Tax and Rewards at PKF, who also thought it wasn't feasible to raise the CGT or NIC rate in June - so put your money on a VAT increase instead...

According to Fisher, CGT only brings in £4-5bn a year, so tinkering with the rates won't really put much of a dent in the deficit anyway. "The headline rate will go up, but I expect to see some form long-term holding or business relief," he said.

Predicting a "damp squib" on CGT for tomorrow, he also warned that many people rushing to dispose of assets before 22 June might discover that it might be just as advantageous to hang on.

julian.sims's picture

CGT changes and timing

julian.sims | | Permalink

I have to agree with the comments made by Philip - an increase in headline rate is to be expected but changes to reliefs is likely to give winners and losers.  The only thing acting before tomorrow achieves is certainty - but you could be better off by waiting depending on the actual rules proposed.

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