Darling Climbs Down On CGT

Household money

Updated on 16 December 2008 | 0 Comments

The Chancellor has announced an "entrepreneurs' relief" to capital gains tax. This could be good news for Fools who own small businesses.

Alistair Darling has changed his mind on Capital Gains Tax (CGT), and has announced a partial climbdown from the proposals he announced last October. These proposals were widely criticised and The Fool's Cliff D'Arcy wasn't happy either.

So what was the problem?

Last October's proposals looked good at first glance. Higher-rate taxpayers currently pay 40% CGT but Darling planned to introduce an 18% flat rate from this April.

The problem was this:taxpayers currently benefit from `taper relief' which means that if you have held an asset for a certain period you pay a lower rate of CGT. Darling's plan was to abolish this relief.

This change was particularly tough on holders of assets that qualify for `business property relief.' Currently owners of businesses, employees who invest in their employer and others, can end up paying just 10% CGT -- that's once they have owned the asset for at least two years. That concession was due to go, but today the Chancellor announced his `entrepreneur's relief.'

This new relief will apply to anyone who owns a minimum 5% stake in a trading business and is an employee, company director or `other officer' of the company. Any such person will only be taxed at 10% on the first £1m of gains. Any further gains will be taxed at 18%. Crucially, £1m is a `lifetime limit' so once you've gained your first million, you'll be taxed at 18% for the rest of your life. (That's assuming future chancellors don't tinker with those rules at some point.)

The most disappointing aspect of today's announcement is that it doesn't help private investors who invest in AIM-listed shares. Currently they only pay 10% CGT once they've held their investment for two years - thanks to business property relief.  Sadly they will still be paying 18% CGT on their gains from April 6th. Today's announcement makes no difference. (Of course, private investors don't have to pay any CGT on the first £9,200 of gains they make during the tax year.)

So what's my view?

I welcome any move that encourages entrepreneurship, but it would be nice if the Chancellor could do something to encourage private investors too. Perhaps he could allow private investors to place AIM-listed shares in ISAs? Then investors wouldn't have to pay any CGT on profits they made from investing in AIM-listed companies.

More: New Tax Rates: Winners And Losers

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