Just listening to Alistair Darling’s Pre-Budget Report. He has announced, with effect from April next year, the abolition of taper relief. Click here for the press notices (pdf).
The way taper relief works is that it reduces the chargeable gain when a capital asset is sold. This relief is available to everybody who sells, or otherwise disposes of, a chargeable asset. It is not a special relief claimed only by private equity barons.
The amount of taper relief available depends on whether the asset being sold can be classed as a ‘business asset’, and also, on how long the asset has been held. A business asset held for at least two years would attract the most generous taper relief rate. In such a case, only 25 per cent of the gain would be charged to tax. In the case of a taxpayer paying tax at the 40 per cent rate, this works out at an ‘effective rate’ of 10 per cent on the gain.
So, in summary, if you are a higher rate taxpayer, holding a business asset, and you have held it for at least two years, you end up paying capital gains tax on sale of only 10 per cent.
However, the Chancellor has just announced that taper relief will be abolished, and will be replaced by an 18 per cent tax rate.
This seems to equate to a tax rise on anybody who has held a business asset for at least two years. Including small business owners who are disposing of some of their capital assets.
So, in attempting to clobber private equity barons, New Labour has attacked every businessman in the land, some of whom can hardly afford it.
The Treasury is publishing consultation on the abolition of taper relief. I will be following closely to see the extent of the proposed abolition. If the detailed proposals bear out what we have been led to believe from the press notice, then small businesses should worry.
October 9th, 2007 at 6:30 pm
It appears that capital gains tax on the disposal of holiday lets has effectively been increased by 90%. As the entire asset is disposed of in one tax year, only 9K can be used irrespetive of the time the property is owned.
October 10th, 2007 at 8:11 am
Interesting- having not followed the detail I had no idea about this but would be interested in further coverage of it.
October 10th, 2007 at 3:32 pm
Spot on, Bel.
Despite all the spin about Brown supporting entrepreneurship, and “enterprise for all” etc, with his Enterprise Areas and assorted policies, he actually increases taxes on small businesses and entrepreneurs. What is this about? David Birch in the US, and more recently other UK academics, showed how small firms create over 95% of new jobs.
Maybe in the future some academic will write about Brown destroying jobs in small firms…
October 10th, 2007 at 8:13 pm
I think I’m right in saying that most advanced economies allow at least an inflation indexing on assets before CGT is charged. What is so wrong with at least offering an indexation allowance? Also, in many countries, if you hold an asset for five years there are no gains. What’s wrong with these New Labour thieves? Anyone would think it was their money. I’m rapidly reaching the point where I would like the government to simply confiscate all my earnings and give me back a portion it thinks I deserve to keep. That would be more transparent and honest. Then at least I would know I was a slave and that I had certain rights as a slave. Let’s have no more pretence about the electorate being the master. We are all Gordon’s vassals now.
October 10th, 2007 at 8:54 pm
You are right, MarkS. As you may may be aware, indexation allowance for individuals was abolished by Gordon Brown in 1998, and replaced by taper relief, which is now to be scrapped.
Indexation allowance for companies survived the 1998 reforms, but from my reading of the press notices yesterday, I am not sure if it will still be in place come next April.
These latest reforms of capital gains tax for individuals leaves no relief or incentive for holding on to an asset for long. So a person who buys an asset and sells the next day is in the same position as one who buys and holds for ten years. Surely that cannot be right. That does not encourage entrepreneurship, the holding of shares etc. And this from a Government that claims to care about enterprise, small business, etc. Shameful.
October 10th, 2007 at 9:31 pm
There is no way I would start up a business in the UK now. We’re all working for the government and these new labour stalinists seem to think we should be grateful even to be allowed to work for them. I’d happily pay my taxes if I felt I was getting anything back but I’m not.
October 29th, 2007 at 1:18 pm
I have owned my business for over 25 years and if i wished to sell now my capital gains tax, allowing for indexation and taper relief, would work out at £59,000 - if I do not sell until after the 6th of April next year my Capital gains tax payable will increase to £144,000. So after all these years of working at my business and just before wanting to retire this government robs me of over £80,000 from my retirement fund. This is robbery - out tax planning strategy has just been ripped to shreds. Also many people here in the west country who own Hotels and similar small businesses arte likely to see a stampede of people trying to sell their businesses before the 5th of April 2008 - this is not a healthy situation. Also it is worth noting that many business still have heavy mortgages to pay off when they sell their business asset as many of them have had to survive some nasty recessions in the last twenty five years. By the time they have paid their increased tax bill retirement may not even be an option.
October 29th, 2007 at 1:48 pm
[...] extract from a comment on my post about taper relief, which I thought merited wider publicity: I have owned my business for over 25 years and if i [...]