With the new Conservative / Liberal Democrat UK Coalition Government firmly in place, all eyes are planted on their forthcoming emergency budget, and the tax changes that are to be expected with it.
The new Government has already stated its intention for some areas of tax, one of those being Capital Gains Tax (CGT), the plan being that the standard rate of 18 percent will be scrapped in favour of a rate connected to income.
For those of you are unsure about Capital Gains Tax, what it is and if it affects you, here is a quick guide to the what’s, why’s and who’s of Capital Gains Tax.
Capital Gains Tax is the tax that must be paid when profits are made from selling assets. It was originally started in 1965 to stop people who solely operated in the property market from avoiding income tax. As things currently stand the rate of CGT is 18 percent, but that’s all about to change.
Following the Hung Parliament fallout of the General Election that just passed, Nick Clegg and his Liberal Democrats joined forces with the Conservative party to form the Coalition Government. As part of this union the Lib Dems brought in their ideas for Capital Gains Tax. The proposed changes have Capital Gains rates "closer to those applied to income tax" which would see the basic level of 18 percent go up to 20 percent, and the high earners of the UK paying either 40 or 50 percent.
Another factor that may be changed is the threshold for CGT, which currently stands at £10,000. Under the Liberal Democrat plans the threshold could go down to £2,500, sources suggest.
The main reason for increased taxes is the staggering level of debt the United Kingdom has, all measures are ways to reduce the huge deficit. In 2009 CGT raised £7.85 billion for the Government, with the new changes in place the Lib Dems hope that they could raise an extra £1.92 billion.
However, not everyone thinks that an increase in CGT is a guaranteed way to bolster the economy. Economists have already voiced concerns, citing previous examples that show that an increase in CGT could actually have the opposite effect and damage the economy. Research from The Adam Smith Institute shows that every time the United States has increased their CGT there has been a decrease in revenue for the government. This can be attributed to decreased activity in the market, as asset holders deliberately hold off from selling to avoid the CGT.
Anybody who sells any type of asset, a second home, a buy to let investment, somebody in possession of shares or even somebody who has inherited some kind of valuable artefact that can be sold on at an increased value.
Economists estimate that with a lowered threshold up to 1 million people could face Capital Gains charges, compared to last year’s figure of 130,000 people this is a colossal increase. In the last decade many people have sought entry into the world of investing, via shares and property, in a bid to increase their income after receiving small pensions. These blue collar investors could be hit the hardest by the new regime.