Budget 98 - Capital gains changes look long term
New capital gains tax rules are simpler and will reduce avoidance, but according to tax experts not all entrepreneurs will benefit.
‘When you’re ready to start up we’re on your side,’ said the Chancellor, announcing changes to CGT designed to benefit the entrepreneur rather than just ‘the short-term speculator’.
Brown said the chargeable gain on business assets would be reduced according to a tapered scale, so assets held for 10 years or more will be taxed at a rate equivalent to 10p or less. As a quid pro quo, retirement relief would be phased out over a five-year period.
Indexation will be withdrawn after April 1998. Bed and breakfasting of shares to reduce capital gains tax bills will be stopped by matching shares sold and repurchased within 30 days.
There was general agreement that these changes constitute an impressive simplification of CGT and that they would reduce avoidance. ‘If you have low rates of tax people are less concerned to avoid them,’ said Nicholas Woolf, partner at Arthur Andersen.
Brian Dunk, CGT partner at Coopers & Lybrand, added: ‘Many of the offshore schemes will not be worth subscribing to because it will cost more to set them up than it will to just pay the tax.’
The abolition of indexation, though not retrospective, will help eliminate the ‘old trick’ of turning gains, such as interest, into capital gains, such as money made on the sale of options, said Ian Johnson, capital gains expert at law firm Ashurst Morris Crisp.
But Patrick Stevens, a partner at Ernst & Young who before the general election campaigned for relief for entrepreneurs, was worried that the best entrepreneurs would not benefit from the changes.
‘The people who start it up and move on after about four years are the big wealth creators, but it’s the ones who hang on for ten years who will really benefit. People planning to retire might hang on for a while to pick up the higher CGT relief.’
KPMG partner David Kilshaw, added: ‘Some people may fall between the two stools of increasing entrepreneurial relief and phasing out of retirement relief. And smaller shareholders may suffer.’