Chancellor of the Exchequer Alistair Darling announced in the pre-Budget report that the rules on capital gains tax (CGT) will change from 6 April 2008. The current system of taper relief allows investors to pay just 10% on investments held for two years. In place of the taper relief, Mr Darling is introducing a new flat rate of 18%. He has intended to raise additional taxation to target private equity investors, who have been described as ‘paying less tax then their cleaners’. The details of how this is to be done were not precisely spelled out.
The net effect will be to set back the growth of the economy over coming years, by discouraging longer term investment and risk-taking. This will hit all businesses in the UK and reduce the tendency for entrepreneurs to start new businesses. The previous arrangements encouraged entrepreneurs to take higher risk and the tax system rewarded them accordingly. The changes lead to expectations that many business owners will sell up in the period up to 5 April 2008, as people make sales to avoid much larger tax bills.
This compares with the CGT position on disposal of personal assets. The current effective rate is 24%. With the flat rate of 18%, general investors in shares and those with buy-to-let or second properties will find their position improved. No holding period will be required to benefit from this new rate.
Despite the new flat rate in CGT, Mr Darling said that the UK would remain “one of the most competitive single rates of any major economy”.
