Thousands of second-home owners and wealthier individuals were among the winners from yesterday's pre-Budget report, after the Government unveiled plans to slash the rate of capital gains tax from 40 to 18 per cent.
Currently, individuals are taxed at 40 per cent on any gains above £9,200 in any one tax year – although using taper relief, this rate can be reduced to as little as 24 per cent on assets held for 10 years or more.
CGT tends to hit holiday-home owners and residential buy-to-let landlords who are selling their properties, as well as wealthier individuals who realise capital gains when selling investments. However, as of 6 April next year, all capital gains above the personal allowance of £9,200 will be charged at a flat rate of 18 per cent – while taper relief will be scrapped. For those who don't make full use of taper relief, this will mean a 55 per cent reduction in their CGT bill, while even those who have held their assets for 10 years or more will pay 25 per cent less tax. Individuals will no longer need to hold on to their assets for many years to minimise their tax burden.
Gavin Oldham, chief executive of the Share Centre, said the changes could increase liquidity in some investments, as investors would no longer be forced to hold on to assets to benefit from taper relief. "This will provide a major encouragement for those investing in listed UK equities and should result in significantly improved liquidity," he said.
Gary Robins, chief executive of Hotbed, the UK's largest private investor syndicate, said the changes would be bad for smaller companies and would encourage short-termism. "Taper relief was put in place to encourage investment in unlisted securities and reward private investors for holding unlisted shares for longer periods of time," he said.
"Doing away with taper relief altogether means that there is no longer any reason for investors to hold unquoted shares for a longer period.
"It will have the undesirable effect of encouraging short-termist investing."
Caroline Bevan, senior manager at PricewaterhouseCoopers, said while 18 per cent was a competitive rate, there remained a danger that the increase would drive businesses overseas.
Ruth Dooley, a tax partner at Grant Thornton, the accountants, pointed out that employee share schemes also stand to be adversely affected by the changes. Currently, employees are only taxed at 10 per cent if they hold their shares for two years or more. Under the new regime, that changes to 18 per cent.
Greg Limb, a director at KPMG, the accountants, added that the removal of tax breaks for employees was at odds with previous government policies. "This seems at odds with the Government's stated aim of encouraging entrepreneurship and investment... many listed companies will feel sore that there will be no incentive for them to encourage their staff to hold their shares," he said.