HUGE SWINGS IN CAPITAL GAINS TAX RATES CONCERN ICAS

The Chancellor of the Exchequer, Alistair Darling claimed that his Pre-Budget Report proposals for sweeping changes to Capital Gains Tax (CGT) were justified as simplification measures, but they will introduce serious new inequities into the tax system, according to The Institute of Chartered Accountants of Scotland (ICAS).

At first sight it appears that controversial private equity gains will be taxed at 18% instead of 10%, while the CGT rate for ordinary portfolio investors will fall from up to 40% to 18%.   However, the Chancellors announcement concealed the true impact of the proposed scrapping of longstanding reliefs aimed at keeping inflationary gains out of tax and rewarding the holding of favoured business assets, hiding vast stealth increases in effective CGT rates.

Indexation relief, given to avoid inflationary gains from 1982 to 1998, is to be abolished.   Taper relief, designed to compensate for inflation since 1998 and give extra relief for certain business assets, is also to go.   Indexation from 1982 to 1998 more than doubles the qualifying cost of an asset owned at 1982.   The withdrawal of indexation and taper relief means that the full impact of inflation from 1982 to 1998, which is currently sheltered from tax because it is not a real gain, will be brought into charge at an effective rate of 18%.

Colin Lamb, Capital Taxes Convener at ICAS, said:

There will be substantial winners and losers.   The change will favour, for example, short term speculative investors in portfolio shares or buy-to-let properties;   their effective tax rate on gains will often fall from 40% to 18%, with further tax savings if they spread disposals over several years to use their annual CGT exemptions.   Many other taxpayers investing in non-business assets will see their CGT rate fall from its current level of between 24% and 40% (depending on their period of ownership) to 18%.

On the other hand, those who have invested long term in farm land or other business assets may find that, instead of paying tax at 10% on their gains, they will suffer tax at 18% on very much larger unrelieved gains;   such taxpayers are often unable to spread disposals over several years to use annual exemptions.   And its not only the wealthy who will lose:   many employees in Save As You Earn share ownership schemes will find their CGT multiplied more than threefold.

We are astonished to find the Government favouring short term speculation and penalising long term business investment by entrepreneurs and their employees.   We would urge the Chancellor to think again.   For example, he could re-base all CGT calculations to 1998 or later to avoid taxing earlier inflationary gains, and retain taper relief for qualifying business assets perhaps extending the qualifying period of ownership for the relief so that it cannot be exploited so easily.

ICAS has also drawn attention to the delay before the proposals are implemented in April 2008.   Taxpayers planning disposals of assets might be wise to seek professional advice, since completing a disposal before the change or postponing it until afterwards could, in differing circumstances, save substantial amounts of CGT.   Many may find it attractive to emigrate to avoid the new higher CGT charges.

NOTES TO EDITORS

1.

The Institute of Chartered Accountants of Scotland (ICAS) is the world's first professional body of accountants, receiving its Royal Charter in 1854.    ICAS has 16,000 members worldwide and in the UK the CA designation is reserved exclusively for their use.

2.

ICAS is the fastest growing accountancy body in the UK in terms of worldwide student numbers with latest figures ( Source: Professional Oversight Board (POB) - Key Facts and Trends in the Accountancy Profession July 2007 ) showing a student growth rate of over 50% from 2001 to 2006. It is the only UK professional accountancy body to both educate and examine all of its students.   The CA qualification is known around the world for consistency and high standards and ICAS enjoys a widely recognised reputation for providing the 'gold standard' in accountancy education.

3.

ICAS is a member of The Global Accounting Alliance (GAA) an alliance of the worlds leading professional accountancy bodies, which was formed in 2005.    The GAA is intended to promote quality services, share information and collaborate on important international issues.   It works with national regulators, governments and stakeholders, through member-body collaboration, articulation of consensus views, and working in collaboration, where possible with other international bodies, especially IFAC.

Email: publicrelations@icas.org.uk