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Capital gains tax rate could hit 45% mark

Sharp increase mooted by Lib Dems as part of its 2015 manifesto

16 August 2013

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High earners could be facing a capital gains tax (CGT) hike and reduction on allowances if Lib Dem proposals to end incentives that shift income to capital for tax efficiency purposes get the green light.

The current rate of 28 per cent on the sale of second homes, businesses or other assets would rise to 40 or 45 per cent, depending on taxpayer's income, and the tax-free allowance for CGT would be reduced from £10,900 to £2,000, the party revealed.

But these ideas would miss the Lib Dems' point, according to accountants Saffery Champness.

Partner in the private wealth group Lucy Brennan said the plans "would only serve to lower the tax take for the Treasury - presumably the opposite effect to the one they intend". (See comment below.)

James Hender, another partner in the group, added: "The current 28 per cent rate of CGT was designed to be roughly the equivalent of higher-rate tax when inflation is taken into consideration.

"If a higher rate of CGT was to be put in place, there would undoubtedly be calls for inflation relief to be introduced so that you didn't pay tax

on a gain which had arisen solely due to inflation. There was such a relief before the flat rate of CGT was implemented in 2008."

The plans were produced by the Lib Dems' "tax working group" ahead of the party's autumn conference.

A senior Lib Dem figure said the policy was consistent with the party's attempts to narrow the taxation gap between earnings and capital, according to the Financial Times (12 August 2013).

CGT rise is non-starter, says Lucy Brennan

“Lower rates of CGT are optimal because they do not impede on an individual’s decision to sell an asset, even if CGT remains a consideration.

“By contrast, high rates would almost certainly cause individuals to hold onto assets for longer, which would mean fewer transactions upon which CGT can be levied, and an overall reduction in CGT receipts for the Treasury.

“The proposed reduction in the annual exemption combined with increased rates would only compound the effect.

“Taking into account the freezing of the inheritance tax nil rate band and the loss of personal allowance of those with taxable income over £100,000, it is surprising that there has been no downward adjustment on the CGT annual exemption to date.

“However, I suspect that the change, if taken alone, would have minimal impact on an individual’s decision to sell a capital asset.”

Lucy Brennan is a partner in the private wealth group at Saffery Champness

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Tax & Wealth structuring