Note that the formal Conservative/Liberal Democrat Coalition Agreement says “We further agree to seek a detailed agreement on taxing non-business capital gains at rates similar or close to those applied to income, with generous exemptions for entrepreneurial business activities” . This wording suggested that CGT rates could be as high as 50% at some point in the future. However, Mike Warburton of accountants Grant Thornton and a highly respected tax commentator, provided a different view on BBC Radio 4's Moneybox programme last Saturday. Warburton said that telephone conversations with the Conservatives revealed that the maximum rate will be 40%. This would take it back to where it was before the 18% flat rate arrived on 6 April 2008. Warburton made two other important points:
- There has been no decision on the annual capital gains tax exemption. The Liberal Democrats went into the election proposing a £2,000 exemption, whereas the Conservatives support the current £10,100 figure.
- The question of whether the indexation allowance is to be re-introduced also remains open for discussion. Before Gordon Brown introduced taper relief in 1998, indexation allowance effectively removed the inflationary element of capital gains from tax.
A £2,000 annual exemption would not only drag many more people into the CGT net, it would also drastically increase the number of taxpayers having to detail gains and losses in their tax returns. The current requirement is that if total disposals exceed four times the annual exemption, then detailed calculations of gains and losses must be included as part of the tax return, even if the overall net gain falls within the annual exemption. A £2,000 exemption would mean an increase in the number of tax returns HMRC has to process. For example, many employees with maturing SAYE share schemes would have something to report and possibly tax to pay for the first time.
It is not certain that all will become clear in the 22 June budget. The “detailed agreement” between the parties may take some time to reach. There would probably also be a natural reluctance on the part of the Treasury/HMRC to change the CGT rate and rules part way through a tax year. It is noteworthy that Mr Darling chose not do so when he announced the flat rate of CGT in the October 2007 Pre-Budget Report
In reality, we do not know what will happen on 22 June and we should probably not try to second-guess the outcome. Chancellors have a habit of coming up with surprised in their budgets. A hurried sale of assets to avoid a speculated increase in the rate of CGT could leave you worse off if, say, indexation is reintroduced or a new base year selected.