Tax Basics

Now we are in October, the young and young-at-heart may be looking forward to a night of witches and warlocks, tricks and treats at the end of this month. However, for those working in tax, there is a far scarier spectre on the horizon, the Pre-Budget Report.

The Pre-Budget Report (PBR) was actually Gordon Brown's invention back in 1997, is normally delivered at some point between late October and early December, and was introduced to give the country more time to get used to ideas before the new tax year starts some three or four months later.

The PBR itself isn't the scary part; rather it is what it may contain that sends shivers down the spines of many. It was PBR 2007 that dropped the abolition of taper relief bombshell and PBR 2008 that first mentioned the words "50% income tax". As a result, the potential contents of the 2009 PBR could be a cause for concern, and if the pundits are right, the greatest consternation may fall, once again, on capital gains tax.

18% CGT

Alistair Darling described the new rate as "one of the most competitive single rates of any major economy" in his 2007 PBR speech, and notwithstanding the fact that he really had to say something positive having abolished taper relief in the same sentence, this is actually very true. The UK itself has not had a single rate of CGT as low as 18% in more than 30 years.

The 18% rate is, reportedly, based on some research that dictates that 18% is a high enough level of tax to fill Government coffers, but low enough such that complicated tax planning ideas to avoid paying the tax are not worthwhile. 

At 18% there were, clearly, losers, largely entrepreneurs banking on a 10% rate only partly assuaged by the hasty introduction of Entrepreneur's Relief in Budget 2008, but there were also winners. Many investors could have only achieved a lowest rate of 24% tax with full non-business asset taper relief, so the Chancellor was actually doing them a favour.

So why change it?

If 18% is such an ideal rate, why would there be rumblings of change? Surely the Government risks looking daft by changing the rate again inside two years?

As with many things in life, the answer most likely boils down to money. All parties are currently under pressure to show how they can cut costs and balance the nation's finances, while maintaining health, school and public services. 

Mr Cameron has endeared himself to all those over 50 by bringing forward the increase in State Pension age by ten years, and the Liberal Democrats have bravely named the elephant in the room by suggesting that public sector final salary pension schemes should be the first costs to be cut.

The problem is two-fold. Firstly HMRC's own projected figures show a fall in CGT revenue from £7.8 billion to £2.2 billion. Just think how many MPs pensions could be saved if even a part of that £5.6 billion drop could be clawed back.

Secondly, the increase in income tax to 50% means the disparity between the taxes has reached a massive 32%, which means it is now worthwhile for taxpayers to investigate ways of planning to convert income into capital (not actually as easy as it sounds!), thereby further reducing HMRC's tax take.

As a result, an increase to 20% or even 25% is not beyond the realms of possibility. Possibly beyond the realms of sanity, but that's another issue entirely.

All change please?

So what are the odds of the CGT rate changing inside the next two months? I'm not a betting man (I'm a girl for starters), but I know you can't rely on Mr Darling saying he won't change it -- he wasn't going to change the remittance basis rules until he did.

But what do you think? Is it fair to change the rules yet again? Are (any remaining) entrepreneurs going to leave the country in the hope of gaining some certainty as to their future tax position? Would you consider hedging your CGT liability at 18% now in anticipation of a future rise?

Answers (ANSW - news) on a postcard.