Capital Gains Tax: Uncertainty causing panic among private investors

Capital Gains Tax: Uncertainty causing panic among private investors

Stockbrokers are being "overwhelmed" with calls from worried and confused investors.

By Ian Cowie
Published: 12:05AM BST 30 May 2010

Stockbrokers are being "overwhelmed" with calls from worried and confused investors unsure what to do about the threat of a rise in Capital Gains Tax to 40pc.

The Coalition Government has said that it intends to increase the rate of CGT in line with income tax, but it has been scant on detail about which non-business assets will be caught in the net and whether there will be any relief to take inflation into account.

There are concerns that any tax rise and reduction in CGT allowances will hurt the small shareholder the most, rather than wealthy "fat cat" speculators. According to HM Revenue & Customs' own statistics, more than half, or 53pc, of all the people who paid CGT in 2008 – the last year for which HMRC has published figures – did so on gains of less than £25,000, a sum equivalent to the national average wage.

As a result, these 130,000 investors paid a total of £211m in tax or just 3pc of total CGT revenues from individuals that year. About 17,000 people declared gains of less than £10,000 before deduction of the current CGT annual allowance of £10,100 – and they accounted for 0.8pc of gains.

By contrast, more than 80pc of all individual CGT was paid by people declaring gains of more than £100,000 each. About 2,000 individuals declared gains of more than £1m each and paid a total of more than £2.9bn in CGT.

Charlotte Black of Brewin Dolphin, the private client investment manager, said: "We are being overwhelmed with clients calling for advice – particularly those approaching retirement, for whom this might destroy their plans to be self-reliant in their old age. We are deeply anxious that any rise in CGT is done without penalising small investors and savers and treating them like get-rich-quick merchants."

Gavin Oldham, the chief executive of the Share Centre, said: "We've had lots and lots of calls from worried small shareholders. Spread-betting is the mighty anomaly in this. This will take money out of the stock market and put it into the pockets of the bookies as gains on spread bets are not liable to CGT."

The Telegraph is calling on the Prime Minister to protect the savings of small investors and second home owners from the rise in CGT. While we support the Government's efforts to cut the deficit, we fear that changing the rules on CGT will hit those who have prudently saved by investing in property or shares.
Ms Black added that investors were confused and that the rise would damage their ability to manage their portfolios efficiently. She cited the National Grid rights issue as a case in point.

"Removing the annual exemption will hit small investors who put their money directly into shares, but choose to sell their holdings in one company and buy in another for portfolio management reasons e_SEnD or, for example, to take up the current rights issue at National Grid," she said.

"They will be effectively locked into holdings, making the market less fluid and reducing the ability of individuals to manage their investments. Or they may feel forced to use more expensive investment vehicles such as offshore bonds, which are not subject to CGT."

Amid rising concern about the unintended consequences of the proposed changes, the Association of Private Client Investment Managers & Stockbrokers (Apcims) has written to George Osborne, the Chancellor of the Exchequer, asking him to consider small investors before he acts in next month's emergency Budget.
The association said the proposals seemed to be "unfair and discriminatory against small shareholders".

In particular, Apcims has urged the Chancellor not to cut the CGT allowance. The Government proposes to raise the rate of CGT from its current fixed 18pc to a level closer to individual investors' top rate of income tax; this could raise CGT to 40pc or 50pc. The Liberal Democrat manifesto said the allowance or starting point for this tax should be cut from £10,100 to £2,000.

John Hall, Apcims' chairman, asked the Chancellor to balance any increase in the rate of CGT with reliefs to reflect the illusory element of gains comprised by inflation. He said: "The impact falls particularly heavily on the smaller individual investor who is more likely to be a longer-term investor than a professional.

He added that experience showed that higher rates of CGT resulted in lower revenues, as investors either used avoidance strategies or simply decided not to sell.

This is the conclusion from the Adam Smith Institute. Its study The Effect of Capital Gains Tax Rises on Revenues states: "Capital gains tax rates in the USA have changed considerably up and down in recent decades and provide a rich seam of data with which one can come to solid conclusions on the revenue effects of such changes.

"The current policy debate in the UK is being conducted amid a remarkable absence of facts. Policy-makers need to proceed carefully and ensure they take an evidence-based approach in order to avoid unforeseen negative consequences of rushed, ill-informed decision-making.

"The pattern shows that every time capital gains tax has been cut, CGT revenues have risen. Every time the tax has been raised, revenues have fallen."

Experts agree that while the pressure is on the new Government to come up with ways of squeezing extra tax revenue from all available sources, there is a danger that we will see a series of short-term decisions on CGT that could have unintended consequences for small investors, owners of second homes, buy-to-let landlords and business entrepreneurs.

Jayne and John Symons (pictured) own shares and a buy-to-let investment to help fund their retirement. Mr Symons said: "It is very difficult to plan ahead, but when the Government changes the rules so drastically, it is even harder. We could end up having to work forever."

Richard Mannion of accountants Smith & Williamson pointed out that CGT was never going to be a huge money spinner for the Government, so its main purpose was probably in completing the range of taxes in order to prevent leakage of income tax. He said: "The most difficult policy areas are arguably the treatment of business assets and the private home. Should business assets be liable at a lower rate of tax and if so how best to accommodate that policy?

"Should private homes be liable to tax? The lack of tax cases on the subject over recent years suggests that the present system for dealing with private homes works and so one would recommend the 'if it ain't broke, don't fix it' principle.

"We need to have a CGT system which is as simple as possible and which will last to provide certainty for all."

http://www.telegraph.co.uk/finance/personalfinance/capital-gains-tax/7782563/Capital-Gains-Tax-Uncertainty-causing-panic-among-private-investors.html