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Changes on the horizon for capital gains tax The Chancellor’s new 18 per cent tax rate is set to benefit many landlords, second home owners and private investors who could pay substantially less tax on their capital gains (CGT). Currently, higher rate taxpayers who sell a property that is not their main residence, or shares in companies listed on the main stock market and make a profit of more than £9,200, pay as much as 40 per cent tax on their profits if they sell within three years. After ten years, the effective rate of tax falls to 24 per cent. They will now just pay the 18 per cent flat rate. This is the largest change to CGT since Gordon Brown instituted taper relief a decade ago and fundamentally returns the tax system to where it started, albeit at a lower rate. Taper relief was introduced by Mr Brown in one of his first acts as Chancellor as a way of encouraging enterprise. Mr Darling announced the abolition of taper relief saying it was designed to make private equity “pay a fair share”. It is hoped that the measure will raise an additional £2 billion in taxes over the next three years. This year there has been much media interest in private equity firms that which buy companies using huge amounts of debt, and how they have been using the tax rules to pay low levels of tax on the “carried interest”, or profits, that they made on their investments. Private equity executives who come from abroad but live and work in Britain face a double blow after the Chancellor said he would tighten the rules on residence. Mr Darling proposes to count the days on which people arrive and leave the country as periods of residency. Individuals are considered to be resident if they have been in the country for 90 days in any one tax year. The British Venture Capital Association criticised the move, saying that the 18 per cent tax rate meant that capital gains tax in Britain was now higher than in France, Italy or America. “The British private equity industry is core to maintaining London as the world’s financial capital. We regret the rise in the effective rate our investors will pay.” There will be winners and losers from the new reforms, with those who have spent years building up family businesses set to lose out, as currently they can potentially pay just 10 per cent, under business asset taper relief. The new rules apply for disposals on or after 6 April next year (2008). If you require any further information about the services that we provide or would like to review your financial planning position, please email or contact us. |
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