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CGT and the 2010 Emergency Budget

An increase in the rate of Capital Gains Tax (CGT) was a key principle of Liberal Democrat policy. With the intention of addressing the difference between the 18% CGT top rate and the 50% top rate of income tax, a rise to 40% or even 50%, plus a significant reduction in the annual exemption had been mooted. As it was, Chancellor George Osborne was more measured in his actions.

In the end, CGT was raised to 28% for higher rate tax-payers and maintained at 18% for everyone else. Osborne suggested any further hike would serve to reduce the yield to the Exchequer from CGT rather than increase it. He also maintained the annual exemption at £10,100, adding this would rise with inflation each year as before.

Although this was a lighter increase than expected, many were disappointed the Chancellor did nothing to adjust the regime for assets held over the longer term. However, he specifically noted the reintroduction of taper relief and/or indexation would prove too complicated. The Chancellor did retain business reliefs and, in some cases, extended them. For example, the 10% CGT rate for entrepreneurial business activities will be extended from £2m to £5m of qualifying gains over a lifetime.

The property and equity markets may have slowed, but those investors who have held assets for a long time may still face a large bill after this Budget. As such, many of the tax planning measures used pre-Budget will now be even more important: Using the annual exemption each year, plus that of a spouse, rather than crystallising a large gain in a single year can help mitigate CGT. Equally, investors should ensure they have made prudent use of the principal private residence relief.

Assets held within Sipps and Isas are exempt from CGT, so it is worth investing up to the annual contribution limits. Also, given the discrepancy between the CGT rate for lower and higher rate taxpayers, deferring a sale may be worthwhile if someone is moving from being a higher rate taxpayer to a lower rate taxpayer – for example, on retirement. 

The CGT changes may also alter the playing field for investment bonds. Following the reduction in CGT in 2008, sales of investment bonds dropped as payouts were subject to income rather than CGT. Although they remain at a disadvantage, the new CGT rules bring the rates closer together and there may be more circumstances in which investment bonds are an appropriate investment.

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