Capital Gains Tax (CGT) was increased by 10 per cent for higher rate taxpayers yesterday, but despite the jump, investors breathed a sigh of relief as the new government decided not to impose a new upper rate of 50 per cent, as many had feared.
George Osborne increased the upper rate of CGT – paid on profits made from asset sales such as shares and second homes – to 28 per cent from midnight last night. The pill was sugared, however, as the 10 per cent relief rate offered to entrepreneurs was increased to cover disposals worth up to £5m, while the rate for basic rate taxpayers will stay at 18 per cent.
The Chancellor said the previous flat rate of 18 per cent had led to one of the "most chaotic" tax regimes he had inherited since taking charge at the Treasury last month.
He said that the under the previous system, "some of the richest people in this country have been able to pay less in tax than the people that clean for them". The Government had considering a system of tapering and allowances, which would have seen a new top rate of as much as 50 per cent, but decided it was too complicated to introduce. The personal CGT allowance was frozen at £10,100.
"It will come as some considerable relief to many entrepreneurs holding assets with latent capital gains that the rate was not increased more in line with employment income, as had been widely reported in the press," said David Brooks, a tax partner at accountancy group, BDO. "An increase to 28 per cent is significant but it could have been far worse. Fear that the rate would be increased to 40 per cent or even 50 per cent has seen a number of wealthy taxpayers hastily implementing planning to capture the benefit of the 18 per cent rate."
Some cast doubt on whether yesterday's changes would lead to huge new tax bills for those that have hitherto paid less tax than their staff, however. "The truth is that the CGT does not really raise that much in revenues because a relatively small group of people pay it," said Ashley Greenbank, a corporate tax partner at Macfarlanes. "It is also a tax that can only be worked out when costs are taken into account, so we can't really say whether it will lead to an increased number of people paying more tax than their cleaners."
Entrepreneurs were the main beneficiaries of yesterday's changes. The entrepreneurs relief rate of 10 per cent was extended to those making up to £5m from the sale of their business: an increase from the previous £2m level. However, a number of experts said that Mr Osborne could have gone further.
"The changes are not actually as generous as they first appear," said Claire Evans, a tax director at Pricewaterhouse Coopers. "The entrepreneur needs to hold at least five per cent of the company... to benefit, so the employee that has been given shares as an incentive will still pay CGT at either 18 or 28 per cent."
Entrepreneurs did benefit from other measures, however, such as the one percent cut in small business corporation tax, from 21 per cent to 20 per cent next year and the extension of the enterprise finance guarantee, under which the Government guarantees 75 per cent of loans for companies with a turnover of less than £25m.
Yesterday's announcement was bad news, however, for those that have pumped savings into the buy-to-let property market. Those that found disappointing returns from savings rates and instead put money into second homes to let, found themselves facing the prospect of higher CGT charges.
"In a few hours CGT for higher and additional rate taxpayers will rise from 18 per cent to 28 per cent," said David Salusbury, the chairman of the National Landlords' Association yesterday. "Although it is disappointing that the Chancellor has failed to recognise the distinction between long-term investment in residential property and short-term speculation, the immediate increase is not as high as the trailed 40 per cent. Nevertheless, the increased rate will affect the vast majority of landlords who supplement a modest income with their lettings activity."