UK Investors Fear CGT Increase

22 March 2010

Many investors have taken action to sell their assets amid fears that the Chancellor will raise capital gains tax (CGT) rates in next week’s Budget. The rumours have prompted investors to sell shares and property in anticipation that the current CGT rate of 18% will be increased by Alistair Darling.

The difference in tax rates between income tax and CGT has led to concerns that individuals might convert income into capital gains, thereby reducing their tax liability – the rate for income tax can be up to 40%, with a top rate of 50% as from April 5. The difference between the current CGT rate of 18% and the top rate of tax is significant. Mr. Darling has already indicated that it will be necessary to ‘close the gap’ at some stage. Some investors are dividing their assets between themselves and their spouses – every individual receives the annual personal allowance – to reduce the overall tax bill.

Richard Browser, editor at Property Investor News, recently claimed that he is “absolutely convinced” that the rate of CGT will be increased, possibly by as much as 7% to a new rate of 25%.

Vince Cable, the economic spokesman for the Liberal Democrats, was quoted by the Financial Times as observing that: “The danger of allowing big differentials to arise between taxes on earnings and capital was clearly understood by Nigel Lawson and the last Conservative government, which taxed them at the same rate.” Mr. Cable favours a return to equalizing the two tax rates.

Although it is believed that the Chancellor will not take any action in this Budget, that hasn’t stopped some people selling their assets ahead of the Budget speech on March 24.

The Chancellor has a bit of a dilemma, on the one hand wishing to at least partly close the loophole which allows the wealthy to pay less tax by turning income into assets, yet he would not wish to repeat the disastrous exercise of three years ago when he raised the CGT rate but was heavily criticized by business leaders for attacking entrepreneurs and ‘wealth creators’.

With tax receipts falling by GBP30bn (USD45.4bn) between 2009 and 2010, the government must wrestle with the need to raise taxation revenues without taking measures that might upset part of the electorate only weeks before the next General Election.

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