Tax U-turn fails to help small investors
By Jennifer Hill, Reuters Personal Finance Correspondent
LONDON (Reuters) – Small investors still stand to lose out from reform of the capital gains tax system, despite Chancellor Alistair Darling watering down earlier proposals, analysts say.
Thousands of investors in share ownership schemes will be hit with 18 percent tax on profits, up by as much as 13 percent, while the move will also create imbalances in the investment bond market.
“In one fell swoop, he (Darling) has hit those people that he would least want to hurt and at the same time significantly benefited the very wealthy speculative section of our community,” said Geoff Tresman, chairman of Punter Southall Financial Management.
Darling announced plans to introduce a single 18 percent rate of CGT in his pre-Budget report last October, scrapping taper relief which had allowed a 10 percent rate for business assets held for at least two years.
But he said on Thursday that entrepreneurs selling business assets would still be allowed the 10 percent rate on profits below one million pounds — a lifetime limit that would be kept under review.
The measure will also apply to individuals selling company shares, provided they have at least a 5 percent stake in the business.
“I am determined that we do as much as possible to encourage entrepreneurship in this country and, in future Budgets, will seek to do more,” he said.
But despite appeasing small business groups and owners, the change has done nothing to benefit those investors who will shoulder a growing tax burden.
More than 270,000 people in “save as you earn” schemes and hundreds of thousands of others who have been encouraged to buy into the companies they work for via share option schemes will be worse off following the changes, due to come into force at the start of the new tax year on April 6.
They will see their CGT liability rise to 18 percent, from as little as 5 percent at present for basic-rate taxpayers who have held shares in their employer for at least two years.
“As well as there being no changes to mitigate the effects on employee shareholders, the uncertainty and repeated delays in confirming this decision mean many employee shareholders will have to make relatively quick decisions about whether or not to sell or hold some of their shares,” said Fiona Downes, head of employee share ownership at ifs ProShare, a not-for-profit organisation that supports employee share ownership in the UK.
The reforms will also disadvantage those with investment bond holdings.
While their CGT liability will still be based on their income tax rate (40 percent for higher-rate taxpayers), those with other investment products — like unit trusts and buy-to-let properties — will be subject to the new, lower 18 percent rate.
Darling said he had already received “representations” from the life insurance industry and invited further dialogue.
A spokesman for the Association of British Insurers said: “The Treasury has today accepted that the announcement on CGT created specific and adverse problems for savers and the savings industry.
“It is vital that the government now commits itself to resolving these as soon as possible.”
Originally posted 2008-01-25 16:09:07.
