|
David Robertson
Associate Director, Perth Office
Rarely in recent times has a pre-budget report
caused as much consternation and debate as that
of Alastair Darling on 8 October. The proposed
capital gains tax reforms brought howls of
derision from many business leaders due to the
announcement that taper relief would be scrapped
from next April and be replaced by a flat rate
capital gains tax charge of 18%. In addition,
the indexation allowance is being withdrawn.
Although this had been frozen (for individuals,
not companies) in March 1998 it more than
doubled the cost (for capital gains tax
purposes) of an asset held at March 1982. It is
the abolition of taper relief however which has
understandably caused so much controversy.
Ostensibly withdrawn in order to produce a
simpler method of calculating a capital gains
tax liability and ensure a fairer amount of tax
payable, the former objective could be argued to
have been achieved, but it is difficult to see
how the latter has. At present, a higher rate
tax payer who has built up their business over a
number of years could sell up and pay an
effective rate of 10% tax on the capital gain
(only 25% of the gain being taxable at the
marginal rate once the business asset had been
held for two years) as opposed to the 18% rate
payable from 6 April 2008. This effectively
increases the tax bill by 80% for a higher rate
tax payer and by a mind boggling 260% for a
basic rate tax payer! This demonstrates that
while venture
|
|
capitalists will obviously pay more tax, an
awful lot of other people will feel the pain of
increased tax apart from them. However, a number
of major investors (and asset strippers) will be
laughing all the way to the bank. At present, an
investment asset has to be held for ten years to
obtain the maximum taper relief of 40% (no taper
relief available at all in the first two years),
an effective tax rate of 24% for a higher rate
tax payer whereas under the proposals, the 18%
rate will be available immediately. My own view
(without any knowledge of the effect on the
exchequer) is that the twin aim of simpler and
fairer capital gains taxation could very easily
have been achieved not by abolishing taper
relief but by simplifying the rules. First of
all do away with the differentiation between
business and non business assets as all
businesses require investment whether or not
these are trading businesses or the investor
works for the business. In addition, the period
required for an asset to be held in order to
qualify for the maximum taper relief could be
extended. No taper relief would be available
until the asset had been held for two years say
at which point the chargeable gain would be
reduced by 15%, with a further 15% annually
until the maximum 75% taper is achieved once the
asset has been held for six years (this would
probably be considered medium term by most
people but very definitely long term for a
venture capitalist!)
At the time of writing, Mr Darling seems
unlikely to move on the abolition of taper
relief but it is believed by some people that he
may re-introduce retirement relief for small
business owners. The debate on this may run for
some time yet.
My own view (without any knowledge of
the effect on the exchequer) is that the twin
aim of simpler and fairer capital gains taxation
could very easily have been achieved not by
abolishing taper relief but by simplifying the
rules
|
|
