Beardsworth – New millennium capital gains tax

This article suggests some changes to CGT that, for varied reasons, I would hope to see in the Budget – though admittedly not all with much confidence. CGT cries out to be reformed and simplified (particularly as it affects business people); to be a proper tax for our economy.

CGT is really in quite a mess. In 1997/1998, only 130,000 individuals were liable to CGT, its Exchequer yield was moderate, and yet it is unduly complex, arguably the most complex of our taxes.

Some tinkering with last year’s new taper relief may be expected in March, although I expect changes will have to wait for another year, by which time more experience will have been gained of the relief in practice.

As a start, though, why not make taxpayers’ task easier: abolish indexation and rebase CGT to 6 April 1998, to coincide with the introduction of taper relief? 31 March 1982 is now quite distant; by next year, it will quickly seem antiquated.

Perhaps of more political appeal, to give taxpayers a fresh start in the new millennium, the chancellor could wait until March 2000 and rebase to 1 January 2000. Imagine the soundbites!

The CGT legislation has a declaration limit, below which gains do not have to be returned. For the current tax year, the limit is total gains of less than #6,800 provided that total proceeds are less than #13,600. This is unnecessarily complex; taxpayers whose proceeds are below #13,600 first have to do the computations, only to perhaps find that gains do not have to be declared because they are less than #6,800. Why not make gains automatically exempt if proceeds are less than, say, #10,000 – regardless of the gain?

One of the frequently asked questions by businessmen is whether their company qualifies for tax relief – perhaps whether it is a trading company for CGT, income tax or inheritance tax purposes; or whether their involvement qualifies as ‘substantial’ so as to attract favourable tax reliefs. The responses to such questions are normally convoluted and subject to caveats, the adviser having to explain the definitions depend on the particular tax and even the particular relief. It is quite easy for the client to believe there has been a conspiracy to complicate. Wouldn’t it be far better to admit the unnecessary confusion, start afresh with a standard all-purpose definition, limiting the exceptions to the absolutely bare minimum?

Reforms aimed at giving incentives to spend on R&D and the expected proposal to align the treatment of intellectual property with that in the accounts are to be welcomed. More could be done for such businesses on the CGT front. For instance, many companies will be formed and, if successful, sold within a few years of start up. CGT taper relief could be used to encourage such businesses by granting their owners a faster rate of taper, perhaps giving them an effective 10% CGT rate after five years, rather than the normal ten.

The enterprise investment scheme, which includes CGT reliefs, is aimed at encouraging investment in new or expanding trading ventures. Gordon Brown particularly wants, according to the November 1998 Green Budget, to encourage entrepreneurs to make ‘serial’ investments in small growing companies. The vision is that, as a company graduates to new funding sources, the investors would be able to switch their investments to new companies and continue their tax relief. This presents a promising opportunity to provide emerging companies with a new source of finance.

What is needed, in addition, is for some of the more complex rules on the EIS to be relaxed to provide greater encouragement to investors. At present, the wide number of sometimes abstruse rules which either deny EIS relief from inception or subsequently lead to it being withdrawn can act as a positive disincentive to investors. Simplification is called for.

Despite its low Exchequer yield, CGT will probably always be with us, perhaps primarily to act as a check against the avoidance of income tax.

It is, however, unnecessarily complex, a mishmash of separate rules rather than a targeted, focused tax. Reform is called for.

Allan Beardsworth is a partner in Deloitte & Touche, Leeds

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