Budget: CGT

says

"capital gains tax will rise from 18 to 28 per cent for those with total income and taxable gains above the higher rate threshold"

tim

Thanks - yes I found it. Mean that people on low incomes but with a "high gain" pays tax at 28%. So much for "being straight"

1. In working out the CGT payable, taxpayers will be able to deduct losses

and the AEA in the way which minimises the tax due.

Example 1

In 2010-11 X's taxable income, after all allowable deductions and the

personal allowance, is 27,400. The upper limit of the income tax basic

rate band is 37,400. X sells an asset in May 2010 and realises a

chargeable gain of 17,000. In November 2010 X sells another asset,

realising a chargeable gain 25,100. X has no allowable losses to set

against these gains, and the AEA for 2010-11 is 10,100. Neither of the

gains qualifies for entrepreneurs' relief.

X's taxable income is 10,000 less than the upper limit of the basic rate

band (37,400 - 27,400). X sets the AEA against the later gain (because

part of that gain is liable to tax at the higher CGT rate), leaving 15,000

taxable (25,100 - 10,100). The first 10,000 of the 15,000 is taxed at

18 per cent and the remaining 5,000 is taxed at 28 per cent. The

17,000 chargeable gain X realised in May 2010 before the change of

rates on 23 June 2010 is taxable at the old 18 per cent rate.

Like all chancellors, GO is already trying to mislead us. He says "A substantial part of the revenue from this measure comes from higher income tax receipts as the incentive to convert income into capital gains is reduced."

How does he work that out - given that top rate IT was 40%, with CGT at 18%, and now they are 50% and 28%. The 18% / 50% period is too recent to know its impact.

Somebody guesses for him.

Undoubtedly some income conversion that took place at the 40%/18% level will not take place at the 40%/28% level . But some will continue, as will much at the 50%/28% level.

OTOH, if you set the CGT rate too high there is a disincentive for "genuine" investment and you will lose tax take due to loss of economic activity (and it's claimed, because people don't sell their assets, but I don't buy that - if they need the money, they need the money)

What these numbers are have to be pure guesses.

IMHO they are probably significantly affected by the general economy, i.e there is a greater incentive for people to "invest" in their own business when there is less other work for them to do. Hvaing been in a boom for 20 years I bet the model that they use doesn't take this into account.

Having said that, it could be that he set the level at 28% because that was the figure that he thought he could sell to his backbenchers and just fudged the figures for expected tax take to keep the LDs onside

tim

He probably learnt this trick from GB :-)

tim

Osborne said he wanted to kill a loophole of people converting income to capital gain in order to avoid tax. A husband and wife team turning over a property or two a year enjoys both annual income tax allowances and cgt allowances. They also pay tax at the lowest rate ie 18%. They make a killing. Long term investors lose inflation because as you say no indexation or taper and pay 28% on a chunk of their long-term gain.

He has managed to accomplish the reverse of what I thought he wanted to do

What do you mean by "turning over"? Are you talking about people who improve property or landlords who "rotate" their stock?

How can they have a CGT allowance and an income tax allowance on the same income stream?

Only if total income is less than about 50K each.

You'll have to explain.

He hasn't made the situation any better for your example.

His "income into gains" target is not people investing in property it is VC (and other) business investors. I know of many people who do it.

tim

In message , tim.... writes

Until they can be dispensed with. At present they are useful to place on either side of David Cameron at PMQ.