Capital gains and wild exaggerations

We now know that the “Emergency Budget” will be on 22nd June. In the interim we will have further flapping about the headline rate of capital gains tax going up to the highest marginal income rate (40 or 50%), as opposed to the 18% flat rate we currently have for non-business assets and an effective 10% rate for business assets.

Well hang on, isn’t that what we had up to April 2008, only two years ago? The rate then was effectively 10% for business assets held for two years. The maximum rate was 40%. There was taper relief to allow for assets held rather longer, and the main downside of Mr. Darling’s flat-rate bombshell was that actually tax payers who had held assets for a long time, perhaps 20 years were worse off for the loss of indexation relief built in to 1998 with effect from the change after April 2008.

I suspect that it would be quite easy to re-introduce a taper relief of some sort to avoid taxing inflation too much, and perhaps some new form of short term gains tax could be introduced to punish the City people who were able to say that the rewards for their services were capital gains rather than remuneration subject to higher rate tax and National Insurance.

I do not expect the very long term investors are going to be able to avoid being taxed on inflation altogether, but prudent investors should be rewarded with a lower effective rate with some sort of relief.

When will the new capital gains regime start? April 2011, April 2010 or 22nd June 2010? I have no idea of course and this is more idle speculation but given that the tax take from CGT is small, there is a degree of political window-dressing, so I am hopeful there will be some suitable reliefs in place under the new rules.

© Jon Stow 2010

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