Alistair Darling went a little way to ease fears on his proposed capital gains tax (CGT) reforms last week. However, some argue that his proposals have not done enough to protect smaller investors.
In his pre-budget report in October the Chancellor outlined plans to get rid of indexation, business tapering relief and variable CGT, substituting a new single 18% tax rate.
The news was not greeted favourably by the business community, which said that investors who would otherwise have qualified for accelerated taper-relief amounting to about 10% tax on gains after three years, would see that figure rise to 18%.
Last week, however, the Chancellor stated that although he plans to stick by his flat 18% taxation rate he would now include a lifetime allowance of 10% of capital gains up to £1m in his proposals. The proposed changes would apply only to investors who hold at least 5% of the voting rights of a company and who are also either employees or directors.
Alex Antonius, sales director for technical services and fund partners at F&C Investments, says the effects will be felt most strongly by taxpayers at the lower end of the spectrum.
“For a higher-rate taxpayer, who would have ended up paying around 24% CGT after 10 years, they will be better off waiting to sell until April as their tax will drop to 18%,” Antonius says.
“One area that has been overlooked in the media is employees that have ownership of companies and get business taper relief.
“None will own as much as 5% of their company and they will find their CGT rising from 5% or 10% to 18%.”
The changes are also likely to affect sentiment among venture capital trusts (VCTs), according to Giles Hargreave, chief executive officer of Hargreave Hale, a stockbroking firm, and fund manager of two VCTs.”[The changes] are bound to take the pressure off people thinking of selling their companies before April,” Hargreave says. “Between now and April 5 you will not be seeing many small companies coming on to the market.”