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Capital gains tax cut cheers investors, annoys landlords

The icing on the Budget cake for investors was a cut in capital gains tax although it does not apply to landlords and fund managers.

 
Capital gains tax cut cheers investors, annoys landlords

In addition to unveiling the Lifetime ISA, the chancellor pleased investors of all ages with a big cut in capital gains tax.

Chancellor George Osborne slashed CGT rates in his eighth Budget, with the headline rate of 28% paid by higher rate income taxpayers being cut to 20% and reduced from 18% to 10% for basic rate taxpayers.

‘The rates will come into effect in three weeks’ time. The old rates will be kept in place for gains on residential property and carried interest,’ said Osborne. Carried interest is the term applied to the gains made by private equity fund managers investing in unquoted companies.

‘The chancellor has made it even more attractive to create wealth through capital gains rather than earnings,’ said Dermot Callinan of accountants KPMG.

‘The details are to follow, but this will enable all investors to benefit by realising the profit on the sale of shares and other assets at the reduced rate of tax. Not only do these very substantial reductions bring us close to the position in 2008, they are also forecast to cost the Treasury £2.8 billion over the next five years,’ said Callinan. 

Online stockbroker The Share Centre calculated that the CGT changes, the increase in the ISA allowance to £20,000 next year and the introduction of the Lifetime ISA ‘amounts to a £5 billion boost for savings and investments’.

Richard Stone, chief executive of The Share Centre, said it was ‘a substantial commitment to encouraging more people to invest and save for their own and their family’s futures’.

Arguably it is a blow for property investors, however, who are excluded from the reduced CGT rates and who have already been subject to a reduction in the amount of mortgage interest relief they can claim and higher levels of stamp duty on buy-to-let properties.

Nimesh Shah of accountants Blick Rothenberg said landlords could be forced to set up corporate structures around their property investments to protect them from higher rates of tax.

While the sale of a second property by a higher rate taxpayer would still be liable to CGT at 28%, the sale of shares in a company that owns a residential property, or portfolio of properties, would pay 20%.

‘The major reforms to CGT…will encourage investors in residential property to use company structures – exactly what the government was trying to prevent when they started to reform property taxation in 2012 to discourage corporate ownership of residential property,’ said Shah.

Shah said the new rules could ‘quite easily lead to a future market among investors to trade shares in companies owning residential properties’.

‘The government needs to be mindful of the latest policy measures, which are certain to have a significant bearing on taxpayers’ behaviour to use corporate structures,’ he said.

David Kilshaw of accountants Ernst & Young complained: 'Once again the chancellor has chosen to make private equity fund managers the bogeyman of his Budget by excluding them from the cut in CGT rates which will apply to all other disposals of stocks and shares.'

3 comments so far. Why not have your say?

RL

Mar 16, 2016 at 20:42

Come on! There's a lot of self serving commentary going on here. If you use a corporate structure you pay CGT inside the company and then CGT again when you finally sell the shares. Yes, I'm sure taxpayers will be rushing to pay CGT twice. Don't you think Mr Shah that investors will only offer a discount for a company owning CGT pregnant assets?

However it would be sensible to have a sliding scale for CGT depending on how long you've held the asset, and it would be sensible to encourage investors to sell second homes by reducing CGT which is a big barrier to selling.

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RL

Mar 16, 2016 at 20:46

'The chancellor has made it even more attractive to create wealth through capital gains rather than earnings,’ said Dermot Callinan of accountants KPMG. This comment by is economically illiterate. Capital Gains are created by growing earnings (unless you have some accounting wheeze up your sleeve Mr Callinan?).

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Cambie

Mar 19, 2016 at 12:23

What this reduction will do is make it easier to manage a portfolio of shares properly. At 28% it was inhibitive to switch shares showing big gains, if there was a better case elsewhere. 20% is easier to justify, and i am sure the Chanellor's tax take will actually be more at this level. Ideally, there should be an even lower level provided there is re-investment in a similar class of asset within, say, 1 month (which would match the rules for re-investing after realising a loss). However 20% is a workable compromise.

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