Fool News: Winners And Losers From The CGT Changes

The dramatic simplification of capital gains tax (CGT) will create both winners and losers amongst individual taxpayers.

The dramatic simplification of capital gains tax (CGT) will create both winners and losers among individual taxpayers, analysts have emphasised.

CGT is a tax on the profit made from the disposal of assets, over and above the CGT exemption rate. The assets eligible to be taxed include shares, buy-to-let property, and unit trusts

Previously, CGT was gradually reduced through taper relief. The reductions depended on both the length of ownership, and the nature of, the asset in question.

Under this system, those holding `business assets' - for example shares in their employer - qualified for CGT of just ten per cent on any assets held for two years.

However, those investors with `non-business assets' - such as those in listed shares and buy-to-let property - did not benefit from such favourable measures. They could only ever achieve a minimum rate of 24 per cent, even after ten years of ownership.

This week's Pre-Budget Report (PBR) swept away all these discrepancies, along with taper relief itself, and instead introduced a new flat CGT rate of 18 per cent, which will come into effect from April 6^th 2008.

The exemption level will remain the same, with an individual able to accrue assets up to the value of £9200 before tax is paid.

Alistair Darling has argued this simplification will "make the system more straightforward and sustainable", as well as ensuring that high-earning private equity bosses "pay a fairer share".

The chancellor also maintained that the new arrangements would `ensure CGT sets consistent incentives for investment and enterprise.

However, many experts have pointed out that smaller-scale entrepreneurs, start-up firms, employee shareholders and investors in Aim-listed companies are also likely to be hit hard by the changes, with their minimum rate of CGT shooting up from ten to 18 per cent.

 Gavin Oldham, CEO of The Share Centre, said there was "no doubt" that entrepreneurial activity in Britain would be adversely affected by the move, calling it "a significant move away from an `enterprise economy'".

The winners - those investors with non-business assets such as buy-to-let property - will see a lowering in their CGT rate of at least six per cent.

Peter Vipond, director of financial regulation and taxation at the Association of British Insurers, acknowledged that the changes should "greatly simplify the tax system" for such individuals, as well as providing "encouragement to save beyond the current ISA wrapper".

However, many of these `winners' will find there is a sting in the tail of the chancellor's reforms in the form of the abolition of several tax reliefs.

One notable fatality is Indexation Allowance - a relief on assets held before April 1998, which offset the then high rates of inflation. Such changes mean that certain investors will actually save much less tax than before.

Those who have been disadvantaged by the CGT changes, particularly people who have already built up a sizeable chunk of taper relief, may dash to sell their assets at existing rates before next year's April deadline.