CGT

There are four pieces of welcome news on the new CGT proposals.

The first is that savers with modest incomes will still only pay 18% on modest gains over the tax free allowance.
The second is the substantial increase in the entrepreneurs allowance as an encouragement to people to establish and grow businesses.
The third is that the top rate is 28% rather than 40% or 50%.
The fourth is the maintenance of the £10,000 plus tax free allowance.

28% will not raise as much money as a lower rate. This year receipts from the first three months are likely to be high, as people sold assets prior to the budget. They are then likely to fall sharply.

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46 Comments

  1. Javelin
    Posted June 22, 2010 at 5:17 pm | Permalink

    For me this budget failed – specifically it failed at a psychological level – I was hoping for a "moment of clarity" – when the UK would stop and realise that the public, the corporates and the Government were addicted to debt. I was hoping for a real shocker to be included in the budget to catch peoples attention – but it wasn't … so carry on as before.

    • Conrad Jones
      Posted June 24, 2010 at 12:49 pm | Permalink

      Javelin – you are not alone. Specifically on the "Carry on as Before" message.

      People on benefits should be encouraged to work for waht they get not expect it handed out on a silver plate. So I agree with a cut in benefits – I don't receive benefits, I have to work for what I've got – If I can't afford it – I will not buy it. News reports showed how upset they were. Which is to be expected.

      On the Other side of the 'Coin' – News reports showed Financial City Workers in expensive Bars and Restaurants; Smoking, Drinking and Eating – and generally celebrating the Budget, planning their next massive irresponsible investment strategy that WE will have to pay for – yet again; while they leave the UK for their Villas in the Sun. Is this Fair or is the UK Public really that stupid – sometimes I wonder.

  2. Paul
    Posted June 22, 2010 at 5:19 pm | Permalink

    It is not welcome – it is simply perpetuating the inequity with other forms of income. Cameron said he intended to eliminate this. But then he said he wouldn't increase VAT. Are you proud to be a politician?

    • Conrad Jones
      Posted June 24, 2010 at 1:00 pm | Permalink

      Paul, Absolutely. The "Changes" on CGT are NOT welcome and will allow the same Boom and Bust to occur – yet again. Banks will yet again fall over themselves to lend to Property Investors (whether the developers know what they are doing or not) as they can repossess the property if people cannot afford the repayments (for whatever reason). Banks do not like proper businesses as the "Business" is THE Asset – if it fails, it's affectively worthless. Banks like hard assets – which is ironic really as they lend out stuff they've magically cungered out of thin air. I don't blame politicians so much now (except Ruth Kelly, who now works for a Bank) – as the current Banking System will go down in History – alongside the "Mississipi Company" created by a Scotsman, John Law in the 17 hundreds, as the biggest SCAM ever. Tulip anybody?

  3. Posted June 22, 2010 at 5:22 pm | Permalink

    While the Treasury might've got 18% CGT from me, JR, he will now get nothing at all. Because I won't be selling.

    Hopefully, that fact will strengthen his case, in the coming year, for lowering it!

    • Simon2
      Posted June 22, 2010 at 7:16 pm | Permalink

      That will show em.

  4. Posted June 22, 2010 at 5:26 pm | Permalink

    PS: … in the same way that in the last few years, the Treasury, due to its high income tax (IR35), will get nothing from me because I've found another way to earn.

    So who does that hurt?

  5. Andrew gately
    Posted June 22, 2010 at 5:42 pm | Permalink

    As a landlord I can live with a CGT rate of 28% and £10k annual exemption, but politically I do not particularly like being included in the same group as City workers who are trying to use CGT as a means to avoid a 50% rate of income tax.

    A higher rate of 40% with taper relief as proposed by JR would have been a better idea.

    • Ex Liverpool Rioter
      Posted June 22, 2010 at 7:04 pm | Permalink

      Andrew
      Sorry to butt in, i take it when you say your a landlord, you mean rent out houses & flats?

      Something i thought about, do you mind me asking but why does CGT @ 28 % make your bussiness untennable?

      Will it force you to sell or just not expand any more?

      Mike

      • Andrew gately
        Posted June 23, 2010 at 1:45 pm | Permalink

        In answer to your question a CGT rate of 28% will not force me to sell up nor deter me from buying more in the future hence my statement that I can live with a CGT rate of 28%.

        My point was that for City spivs an increase in CGT to 28% is still better than paying 50% income tax and I would have liked to see BTL landlords differentiated from City spivs.

        As this tax avoidance by City spivs has not been tackled then I think that the latest changes to CGT will have a short shelf life and future attacks on city spivs will also hurt landlords.

  6. John Whitehead
    Posted June 22, 2010 at 5:52 pm | Permalink

    Fourth piece of welcome news is not lowering the tax-free limits. I think Osbourne has played this very well given he's in a coalition and the IT/CGT avoidance issues given the 50% top taxrate.
    Refreshing to hear a Chancellor wanting to keep the system simple rather than have all sortsof tapering/indexing which appear sensible on the surface but over-complicate matters.

  7. Posted June 22, 2010 at 6:06 pm | Permalink

    Personally, I intend to boycott CGT.

    The sooner the government collapses, the sooner the problem is sorted out.

    What's missing is any mention of the fraud going on at the heart of government which is pensions.

    John, you made statements prior to the election that the debts, pensions included would be published in full.

    1. What's the Civil service liabilities as a present value

    2. Ditto for the state pension

    3. Ditto for the state second pension.

    In terms of discounting, what rate is used for discounting the asset side and the liability side.

    Is it reasonable to use AA bonds for assets that don't exist?

    Nick

  8. Simon2
    Posted June 22, 2010 at 6:13 pm | Permalink

    Disappointing climbdown on CGT after much crowing from the few who benefit from second homes etc. I hope we're not going to see as much dithering and backtracking as the last lot.

    To repeat, I question the argument that raising CGT actually results in lower taxes taken, it may mean less CGT but overall tax intake should go up. If people convert bonuses into shares or buy up multiple houses they pay less tax compared to what they would pay by taking a cash bonus, by removing this loophole (by raising CGT) surely this must boost the tax taken by conventional tax – even if it means overall CGT taken is less?

    Sencond homes must be treated differently to other investments as everyone needs a home. Should have been at least 40% across the board.

  9. oldtimer
    Posted June 22, 2010 at 6:25 pm | Permalink

    The CGT rate of 28% hor higher rate taxpayers looks like an unfortunate compromise. Your taper idea, or indexation for inflation, would have been much better. It remains to be seen whether business angels will be as attracted (at 28% CGT rate) as the entrepreneurs (at 10%) to risk capital in the new business ventures the government hopes to stimulate with this budget.

    Perhaps you could be persuaded to justify this difference in the incentives to invest? Somehow I think this will be difficult. I think this is a flawed compromise.

    • s.r
      Posted June 23, 2010 at 3:10 pm | Permalink

      I used to find indexation simple. Just look up the inflation factors for the years of purchase and sale, subtract and multiply by the tax rate. Apply this to the net gain. Apparently this is too complex for our best treasury brains.

      It is true that, when Brown stopped indexation and brought in the taper, things became confusing, as two systems were operating and the taper cut off inflation after 10 years. However it would have been simple to re-introduce the old index so that illusory gains were not taxed.

      • oldtimer
        Posted June 23, 2010 at 9:42 pm | Permalink

        I agree. JR`s taper system would also be simplicity itself – yet Mr Osborne seems to have opted for different rates (18% and 28%) for administrative convenience.

      • Conrad Jones
        Posted June 24, 2010 at 12:36 pm | Permalink

        I believe that Gordon "No more boom and Bust" Brown changed this method to remove inflation factors to disguise the biggest method of gaining Tax from all of us (especially savers) – INFLATION. The current Lib-Con Pack Government will not reverse this as there is too much Tax to gain from it and they can blame the Method on the Previous Government. Better still – some people still do not understand that INFLATION is a TAX. Which affects the Lower and Middle Classes more than the rich (by Rich I mean the Super Rich). I wish the new Government well.

  10. Ruth
    Posted June 22, 2010 at 6:55 pm | Permalink

    I am pretty happy with the budget – I accepted an offer on my rental property (not a second home Simon2 but a property which was in negative equity for 10 years) this afternoon and as a lower rate taxpayer was mightily relieved on the CGT front. Overall the budget was good for me – as a low income self-employed person it was all positive for me as far as I can see. Overall I and those I have spoken to this afternoon about it feel it was ok, fair and a good start.

    • steve redfern
      Posted June 23, 2010 at 3:02 pm | Permalink

      You should have sold your flat before 23.6.10 as your low income will be added to the gain in value over 10 years putting you in the wealthy bracket. The tax at 28% may be payable on the gain in value irrespective of the negative equity.

    • Conrad Jones
      Posted June 23, 2010 at 4:22 pm | Permalink

      Fogive me my ignorance – I'm no Tax expert but …

      If you are in negative equity with your rented out property and you sell, you shouldn't have to pay any Tax on it at all as the Profit is negative. Is that true?
      If you haven't made any money on the equity then the Government in effect, owes you money as they resided over a failed financial system which caused your negative equity.

  11. Leon
    Posted June 22, 2010 at 6:56 pm | Permalink

    John, I would be interested to know what you think about the VAT hike. I think it is disappointing from a so called Conservative government. What effect is it going to have on spending, should interest rates creep up over the coming 18 months?

    This does little for the retail industry, a major employer, who will no doubt start discounting, which leads to reduced margins to less profit to an aversion to employ.

  12. Paul
    Posted June 22, 2010 at 7:22 pm | Permalink

    I agree with Javelin. Where is the big bang to grab attention? Delaying the VAT increase seems designed to encourage another short-term splurge – doubtless encouraged by low-interest rates despite inflation pressures – which I thought was a discredited policy? Certainly the Tories thought so when Darling cut VAT for a period. And some of the cuts will only start to be noticed much closer to the next election, which seems a bit of an own-goal politically.
    All-in-all, it's more of the same mentality as the previous lot.

  13. gac
    Posted June 22, 2010 at 6:30 pm | Permalink

    It is better to stamp on the throat then release the pressure as results accrue than press gently and then have to constantly stamp harder and heavier because the initial 'pain' was too easy – as Labour were doing.

    I just hope he has applied enough weight from the outset.

    Perhaps Mr R you would give us your opinion when the dust has settled?

  14. Olly Garchy
    Posted June 22, 2010 at 8:24 pm | Permalink

    Extremely disappointing.

    An opportunity to make some changes – lost.

    Public Sector pay should have been cut at the higher end.

    Tax credits should have been phased out altogether. How much of the 50% increase in the amount paid in tax credits is due to fraud? It is wide open for fraud, as is most of the benefits systems, but tax credits are the easiest route.

    Overall missing the drastic changes required. Might still need to call in the IMF at some point.

    Still, the BBC doesn’t like it, so he must have got something right.

  15. JimF
    Posted June 22, 2010 at 8:49 pm | Permalink

    Taken as a whole, this budget wasn't at all the sweeping cleanup that was needed. When it came to the crunch of tearing up our bloated welfare and public sector Osborne bottled it.
    Never mind comparing ourselves with other G20 countries, where are we in comparison with the vibrant Asian economies, Ireland or indeed Switzerland, where CGT is either 0% or a couple of %, same for IHT, Corporation Tax a few % up to 10%?
    We are clearly just not in that league, and this government is taking us, over 5 years, nowhere near reaching it. That it is the depressing news for footloose businesses. We are stuck as a socialist state.

    Meanwhile Housing benefit reduced by I believe £1.2bn from £66bn!!!
    Public pensions kicked into the long grass of a "review" under a Labour Cabinet Minister!!!
    Welfare payments increase by CPI instead of RPI…… these are all negligible changes which will offer no serious difference to our prospects, and offer no significant buffer against the economic winds to come.

  16. Alan Jutson
    Posted June 22, 2010 at 9:57 pm | Permalink

    Yet another rate to get to grips with.

    Understand that by eliminating indexation makes it perhaps a more simple calculation, but we now have it possible that the same type of asset, producing the same profit, owned by two different people on differing tax rates get taxed at different rates on the same profit.

    Is this fair given that the same asset would have been purchased out of the same taxed income by both people.

    Thought the budget on the whole reasonably well thought out.

    Very pleased we now seem to have a limit on housing Benefit (as I understand it)

    Next we want a limit on the total amount of benefits one family or person can get.

  17. Posted June 22, 2010 at 9:58 pm | Permalink

    >>28% will not raise as much money as a lower rate

    Is there any research to back this up or is this a gut feeling?

    The laffer curve predicts an optimal tax rate. I'm guessing the treasury have a model that predicts this, which is where the 28% came from, or at least thats what seemed to Osborne imply.

    • Mark
      Posted June 23, 2010 at 12:41 pm | Permalink

      In the last year of Brown's regime that taxed business gains at 10% if the asset had been held for 2 years, CGT revenue was £7.6bn. Under Darling's 18% for everyone regime, revenue has fallen to an estimated £2.5bn.

      The 28% rate is an obvious horse-trade with Cable for political purposes, not for optimising revenue or for being fair to long term asset holders who will be taxed on inflation if they are forced to sell up.

      • Conrad Jones
        Posted June 24, 2010 at 12:17 pm | Permalink

        Very good point – Taxed on Inflation. The Government has no incentive to reduce Inflation now for two reasons:
        1. The lower inflation is – the longer we will (as a Nation) be in Debt
        2. If Inflation inflates your investment home value (second home etc) then that increases taxable income. So in effect, we pay Tax on top of more Tax because inflation is TAX.
        Measure everything in terms of a fixed finite asset like Gold and there is no inflation. Inflation occurs when the Governerment Prints Currency and dilutes the "Money" supply. Something else to bear in mind is that everytime a Bank approves a Mortgage – more money floods into the System. If everyone paid their Mortgage off – their would be massive deflation as the "Money" supply would more than half. Simple supply and demand economics.

  18. Posted June 22, 2010 at 10:07 pm | Permalink

    This was the first time I've been able to watch the post debate commons feed from the BBC rather than just the main speech itself. Their new democracy live website seems like it will be a great addition to bringing the hidden work of Westminster to the man in the street.

    Your post budget speech was very enlightening. Unfortunately it was followed by some Labour MP basically making the argument against every single tax increase and spending cut but without offering anything by way of an alternative. I turned off after that.

  19. Posted June 22, 2010 at 10:44 pm | Permalink

    I don't see how this will do much to counter avoidance-in fact the new entrepreneurs' relief may well reduce the take and lead to further opportunities for avoidance.

  20. onebadmouse
    Posted June 23, 2010 at 9:29 am | Permalink

    If You sell a house that tou have owned for 15 years, the gain is added to your income, pushing you in to the higher tax bracket. Your ownership is not speculation. You may have a low income or be a pensioner. I am very disappointed that the chancellor did not accept your proposal for a tapering charge,

  21. Posted June 23, 2010 at 10:14 am | Permalink

    I know this is a bit late, but I had an idea that I dont remember hearing.

    Why not charge short term gains (up to two years) as income tax (or corporation tax), using the existing mechanisms and allowances, and keep CGT at 18% for gains on assets held for more than 2 years.

    It is really simple, stops tax avoidance, earns a little extra money and doesnt penalise existing asset holders.

  22. David
    Posted June 23, 2010 at 11:59 am | Permalink

    "28% will not raise as much money as a lower rate." You are absolutely right. I have a let house which I have owned for 15 years and which I want to sell. I was waiting for yesterday's budget before deciding what to do. I'd have paid CGT at 18%: the government would have had a cheque from me for £30,000. But paying £50,000 is too much. That's a year's gross income for me. Today the house is being advertised for let. I won't be able to think of selling again until the next lot of tenants move out, which could be many years hence.

  23. Nick
    Posted June 23, 2010 at 1:33 pm | Permalink

    "28% will not raise as much money as a lower rate."
    I fully agree. I have been considering investing in a private business which needs additional working capital and is struggling to raise bank finance. The business can grow if additional finance is raised, and ultimately will employ more people. With the increase in CGT I will not now do this. This is a loss of tax revenue as well as a loss to private sector growth which the Chancellor purports to promote. An own goal – I think so!

    I hope JR will continue to push for CGT taper relief to 10% or lower for gains of 4-5 years as soon as possible. If George Osborne is serious about stimulating a private sector recovery this is a must., and will surely swell the Treasury coffers.

    Currently it appears the lessons of the Lawson CGT rises have not been learnt.

  24. Conrad Jones
    Posted June 23, 2010 at 4:33 pm | Permalink

    Looking at the Budget at first Glance – it was quite good; Pensioners get their pensions linked to Earnings. Petrol, Cigarrettes and Alcohol – No Change. Great!
    Public Sector waste – Tackled. Silly Grants for Stonehenge – Cancelled and Money saved (I went to Stonehenge recently and the First Thing that I didn't think was – "You know what – this place definitely needs millions of pounds spent on it because those Stones Just aren't interesting enough").

    Unfortunately though, I have become very disappointed with the wimp out of this Government – The Banking and Landlord community have obviously scared Little George into "Doing the Right Thing". Seems to me that one Group in the Economy make all the mistakes and the cost of their mistakes is then shifted to another group. When I make mistakes I expect to pay them. What I sympathise with – as far as the Public sector is concerned is that they will pay for the mistakes of others. Maybe that was the plan all along.

  25. Conrad Jones
    Posted June 23, 2010 at 3:58 pm | Permalink

    CGT – Was this about just raising taxes OR was it about preventing excessive debt in the future? Was it about helping first time buyers?

    Let me repeat that in the form of a multiple choice question.

    Was rasing Second Home CGT designed to:
    1. Increase Taxable income or
    2. Reduce Speculative Property Debt or
    3. Help First Time Buyers or
    4. Pretend to attack the Buy to Let Market without doing anything of the sort?

  26. Conrad Jones
    Posted June 23, 2010 at 5:09 pm | Permalink

    Why was CGT grouped with Business CGT ? Why not group it with buying Gold Krugerrands, which are also subject to CGT. Was this done to let people assume that the same entrepeneurs who create Businesses making things and employing people – long term; are just like the parasites who eat away at the Housing market – inflating prices (with the help of the Banking fraternity) all for a quick buck and to hell with the local communities. Does anyone realise the affect this has on family life and the stress caused by families who have to live tens or even hundreds of miles apart because they can't afford to live close to aging parents or other family members because houses are too damned high. Don't take my word for it, ask an Historical Economist – Mortgages only became widespread after the Second World War, changes to them increased multiples of salaries to further inflate prices. Remember the saying "Neither a borrower nor a lender be". Maybe I'm just an old fashioned Conservative.
    The word "Mort-gage" is derived from the French word meaning "Death-Bond".

  27. Mark
    Posted June 23, 2010 at 5:30 pm | Permalink

    Thank you for your efforts in your campaign to try to secure a sensible CGT regime that would be equitable in its application (including taxing shorter term gains more highly) while also achieving an increased yield of tax to help reduce the deficit.

    Despite the gloss on the new measures sadly they fail the tests. Even the Chancellor has been reduced to pretending that 28% CGT will result in higher income tax revenue at even higher rates when in his own heart he must expect that the new regime will reduce revenues and investment, and that it is really a politics of envy win for Cable. The Red Book shows estimated CGT revenue of £2.5bn under Darling's regime, and a fig leaf estimate of £2.6bn for this tax year – which will have been boosted mainly by those who realised gains ahead of the budget as you point out.

    The one thing that has been avoided is the risk of an asset selloff by imposing the new regime with immediate effect. Tenants will be less in fear of eviction notices in consequence. At least that bit was done right.

    I think you will find yourself campaigning again for more sensible measures for the next budget.

    • Posted June 24, 2010 at 8:15 am | Permalink

      In practice you cant compare the year to year figures because economic activity changes during the business cycle. Over the last year or so people couldnt sell houses because buyers could not get mortgages, and when they did they made lower capital gains because prices fell. Whatever Osbourne did to the CGT rate, with easier mortgages and rising prices CGT receipts would have gone up.

  28. Disaffected Tory
    Posted June 23, 2010 at 5:33 pm | Permalink

    Is this likely to be the last time Gideon visits CGT or can we expect him to slowly make our pips squeak?

  29. Posted June 24, 2010 at 10:54 am | Permalink

    The CGT has not been a popular move from discussions I have had with people so far I do hope the budget will prove the right gamble for the UK we cannot afford to get this wrong now!!

  30. grahams
    Posted June 25, 2010 at 12:42 am | Permalink

    The Budget seems to have been pretty good for gamblers, whether in the City, the betting shop or on the internet but bad for investors, especially long-term investors in an era of revived inflation. Not a good message.

    • Posted June 30, 2010 at 12:36 pm | Permalink

      This is correct and, unfortunately, the longest term investors will often be those who have retired or are nearing retirement. The particular problem of a second home owner who has been paying basic rate tax for many years but who will suddenly find him/herself a highr rate tax payer because of the new rules is really harsh and eminently unfair.

      It is worth looking at what Hotscot (and oters) said on 28 June at http://forums.moneysavingexpert.com/showthread.ph

      I am extremely disappointed that a Conservative-led government has proven to be so insensitive to the situation of tens of thousands of not-particularly-well-off, prudent and independently minded retired people who will be shocked when they learn of their predicament. Indexation must be reinstated or CGT reduced dramatically or exempted for long-term gains. JR's original letter to HM Treasury dated 26 May 2010 prior to the Budget merited much greater attention than it appears to have been given. Don't give up, Mr R. There are many out here who appreciate what you are saying.

  31. Will Rees
    Posted June 25, 2010 at 10:24 am | Permalink

    Following http://www.telegraph.co.uk/finance/financetopics/… my pensioner father who has been seperated from his wife for 20 years contacted his accountant who largely coroborated the article, despite his pension being well under £37,000 he will be hit at 28% when my paerents sell both their houses (as they have been planning to do). The accountant also agreed the budget was a con, and said as such, in her opinion virtually everyone hit by capital gains on property will be taxed at 28%

  • About John Redwood

    John Redwood has been the Member of Parliament for Wokingham since 1987. First attending Kent College, Canterbury, he graduated from Magdalen College, and has a DPhil from All Souls, Oxford. A businessman by background, he has been a director of NM Rothschild merchant bank and chairman of a quoted industrial PLC.
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