Mixed reaction to capital gains tax reform continues

12 October 2007
The Chancellor’s promise to ‘simplify’ the tax system in his pre-budget speech has worried a large proportion of people affected by capital gains tax (CGT).

Many, including business leaders and trade unions, are concerned that the introduction of an 18 per cent single rate in April will impact heavily on all sectors of society.

The CGT rule change would mean that any employee who owns shares in their employer company – approximately 1.7 million according to the Daily Telegraph – will now face an 80 per cent tax increase on their assets, as will many others.

Entrepreneurs who have been taking advantage of the taper relief which reduces the amount of an asset subject to capital gains tax, which was introduced by Gordon Brown in 1997, appear shocked at the chancellor’s decision to do away with the law. It is feared that many businesses will be sold prior to April, when the ruling will take effect.

Shadow chancellor, George Osborne, reportedly described Mr Darling’s pre-budget tax reforms as "using a sledgehammer to crack a nut". He also said that the impact of the CGT increase would be far-reaching.

However, the Institute for Fiscal Studies (IFS) added its support for the announcement to earlier approbation from Standard Life and the Association of British Insurers.

All three have welcomed the simplified system and IFS director, Robert Chote, suggests that the reforms could have been even more hard-hitting, as the tax rate still falls below that on income tax.

IFS senior research economist, Stuart Adam, said: "Moving to a flat-rate capital gains tax regime by abolishing taper relief and indexation allowances is a major and welcome simplification.”

“It reduces the tax advantage of those who hold assets for a long period, but the treatment of capital gains remains significantly more favourable than ordinary income for higher-rate taxpayers, and indeed that distortion has increased where assets are held only for short periods,” he added.

Find out more about Capital Gains Tax

© Fair Investment Company Ltd