Experts warn on giving CGT advantage to business assets

The government is under pressure to alleviate the impact of hiking CGT by reinstating taper relief, while avoiding the mistakes made when it was previously in force.

Richard Mannion, tax partner at Smith & Williamson, says if CGT is brought back in line with income tax, taper relief must be reinstated or long-term savers will be penalised.

However, he argues that the government should avoid giving an advantage to business assets over individual savers to avoid the iniquities of the old system. Taper relief applied to the old 40% CGT rate, before the 18% flat rate came into force in April 2008. For non-business assets, CGT tapered from 40% to 24% from year three of a 10-year holding period; business assets, including employee-held shares, enjoyed a 10% rate after only two years.

A more universal approach

Mannion would prefer that a new version tapered both business and non-business assets in the same way.

‘The press and unions kicked up a fuss in 2008 when it looked like private equity firms were paying less tax than individual savers… so maybe the relief period could be longer, extending it from two years to five years,’ he says.

Flat rate simplicity

Paul Kennedy, head of tax planning at Fidelity (pictured above), says one advantage of the current flat rate system is its simplicity. He believes that feature should remain under the new system. ‘A virtue of the 2008 flat rate was to make it simpler. I would propose a stepped relief, starting at 30% in year one, then 20% in the second year going to 10% by year five. Indeed, that could implicitly account for inflation.’

Kennedy adds that the new regime should ensure tax is only paid on real gains and not on inflation.

‘At the very minimum, they need to reintroduce indexation by deducting a link from the retail prices index,’ says Kennedy.

‘An additional measure would be to make sure people who save in the long term are protected. More important than that is to ensure people aren’t dragged into paying the tax by lowering the threshold from £10,100 to £2,000.’

Fidelity calculates that while an average saver can avoid CGT for nine years by switching or selling investments, the introduction of a £2,000 threshold – as the Liberal Democrats proposed – would cut this time to only two years.

It seems the new government will have its work cut out if it is to meet its aim of equalising income and capital gains while avoiding ‘punitive rates of taxation.’