Brutal Capital Gains Tax loomsPosted on: 18 May 2010 by Gareth Hargreaves
George Osborne's emergency budget will see brutal increase to Capital Gains Tax, says Peter McGahan.
I had the joy of having to review each and every manifesto from an economic perspective pre the election. There was more detail in a pint of milk, yet one, in fact two parties actually got in. That is confusing.
Interestingly with only four pages of the 118 'dedicated' to macro economics, the conservatives had the least detail, and the Lib Dems had the most brutal detail in terms of the impact on the tax payer. There was one thunderbolt - capital gains tax.
What will emerge in a few years time will be the blame the current 'elected' government will place on how negotiations with the minorities during the elected term forced them into having to give in to each other's requirements. 'Sorry about the capital gains tax changes, that was the Lib dems idea but you didn't vote me in with a majority so, well ... it's your fault', will be the standard line.
And so we continue to pay tax and then pay again whilst it is wasted on brutal public sector spend on 'box ticking projects' but we may like to reflect on what is really happening with our money. I understand, for instance, that the enquiry into MP's expenses has cost £1.3m to claim back only £1m.(1) Endless highly effective consultants' reports and meetings I suspect.
But yet, amazingly, it took less than 24 hours for the new 'elected' government to begin making decisions on the economy and who they wanted in each position in power! Now I really am puzzled. Almost like they knew.
Yet the impact of some of the changes will simply realign the wealth of the public in favour of the government, a motivation that appears to be consistent with whoever is in power. The change to concern you all is that of capital gains tax. If you hold money in a trust, stocks and shares, unit trusts, OEICs, or other assets such as a second property, valuable antiques etc you could be in for one of the most draconian measures any government has made.
Capital gains tax was introduced by Harold Wilson in 1965 to stop people making gains elsewhere and avoiding income tax. Gains pre 1965 were free from capital gains tax. It wasn't quite fair in its working and it was recognised in 1982 that inflation was creating a massive hole in our assets, so from 1982, assets could benefit from indexation relief. For example, if you owned a second property which grew by 5% each year in value, it wasn't fair to tax you on that gain, if say inflation had risen at 5% per year at the same time, as in real terms you hadn't actually made a gain. It was conveniently introduced after the colossal inflation of the mid to late 70s.
The only winners were financial advisers and accountants who had to work it all out. Further developments included a change to taper relief to reduce the tax on assets based on how long they were owned, and recently, in what now looks like the ultimate tee up for the current government, it was 'simplified'. Sure it was.
The simplification changed the tax across the board to 18% but all allowances were effectively thrown out such as indexation relief, retirement relief, halving relief and the kink test which all reduced the value of the gain before tax was applied. The changes equalised each other so we were virtually in the same position. The current government however has said it will simply add the gain to the income. As income now has two higher bands of 40% & 50%, many will see their tax bill rocket.
For example if you had bought a property in 1985 for £100,000 to help provide for your future income in retirement, it would be worth £490,617 in 2010. Under the current capital gains tax regime the tax payable would be £68,493. If capital gains tax is added to income, the tax (as you would be forced into a 40% bracket) would be £152,207, but if indexation was re-introduced the tax would come back down to £96,258. These are enormous figures which are nothing other than a complete U-turn which will effectively make buy to let or investing in stocks and shares an almost no-no given the brutality of the tax.
But there are always ways to shelter from such a tax storm. More on that next week.
If you would like independent financial advice on tax efficient investing call Peter on 0845 230 9876, e-mail [email protected]
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Peter McGahan is an Independent Financial Adviser and Managing Director of Worldwide Financial Planning. Worldwide has won 16 Financial Times awards in the last four years. Peter has also been named the top media IFA of the year by Unbiased.co.uk in 2009.
Peter comments regularly in major journals such as the Mail on Sunday, Irish News and Sunday Times and is a weekly columnist for FT Adviser. He has also appeared on Working Lunch and the Today programme. In addition he is an expert on international tax matters for a range of international publications.
Worldwide Financial Planning Ltd are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made. The above represents the personal opinions of Peter McGahan. All information is based on understanding of current tax practices, which are subject to change. The value of shares and investments can go down as well as up.
If you have a financial query you would like Worldwide Financial Planning to respond to, call 0845 230 9876 or email [email protected].
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