Page last updated at 14:13 GMT, Thursday, 24 January 2008

Darling revises capital gains tax

Chancellor Alistair Darling
The chancellor outlined the original changes in his pre-Budget report

The government has announced changes to capital gains tax (CGT), confirming that it will set a single 18% rate and cease taper relief from 5 April.

But Chancellor Alistair Darling also said there would be a 10% rate on gains of up to 1m, to help entrepreneurs.

Some industry groups and small firms have broadly welcomed the lower rate, after fears that the flat-rate plan would act as a brake on new businesses.

The chancellor first announced changes to CGT in October's pre-Budget report.

"I am today announcing the introduction of a new capital gains tax entrepreneurs' relief," said Mr Darling, as he announced the statement in Parliament.

Tax rate of 18% on sales of assets above 1m
Tax rate of 10% on sales of assets up to 1m
About 80,000 people expected to qualify for 10% rate relief
Lower rate estimated to save firms 200m a year

There had been speculation that the government would halve the proposed rate to 9% for gains of up to 750,000 - a plan that had been put forward by the Federation of Small Businesses (FSB).

Mr Darling said about 80,000 people would be able to benefit from the relief, which he valued at 200m annually.

He added that gains made on different occasions would also qualify for the 10% rate up to a "cumulative lifetime total of 1m of gains".

'Mixed message'

The original plans to raise the rate across the board had met with fierce criticism from most business bodies.

But after the announcement, John Wright, the Federation of Small Businesses' national chairman, said: "The chancellor said specifically today that he wanted to help small businesses facing big tax rises from April and that is very good news indeed."

The reality is that these revised measures will do nothing to help the real business powerhouses of this country
Richard Lambert, the CBI's director general

However, Mr Wright added that the way in which the issue had been handled had "seriously eroded small businesses' trust in the government".

"There has been huge uncertainty about what small businesses' tax liabilities would be from April 2008 and this has made planning for the future very difficult," he said.

Business concerns

Other organisations, though welcoming the "entrepreneurs' relief" rate, also voiced concerns about the revised CGT and the manner in which it had been changed.

"Today's announcement sends mixed messages about how favourable the UK tax regime is for investment," said Martin Temple, the chairman of EEF, the industry body for engineering and manufacturing workers.

The CBI said the changes to CGT still meant a 700m tax rise, even after the latest amendment.

"This [the change] is superficially quite clever and on the surface might seem like a relief after three months of uncertainty, but even the smallest business owner will lose taper relief and indexation and be worse off than before October," said Richard Lambert, the CBI's director general.

"The reality is that these revised measures will do nothing to help the real business powerhouses of this country," he added.

The British Chambers of Commerce said it welcomed that fact that the government had recognised the concerns over the reform plans, but reiterated its view that the old system had not needed changing.

"The government should not have changed a Capital Gains Tax system that was working well and helped to foster an entrepreneurial spirit in the UK," said BCC director general David Frost.

'Serial entrepreneurs'

One of the main concerns had been for small business owners who hoped to sell their firms and use the proceeds in retirement.

Speaking on Thursday, Mr Darling said the new measures would benefit the owners of small businesses when they wanted to sell their firms.

But Penny Bates, an accountant with Menzies, said: "The chancellor's announcement has failed to address the main issue."

While it would help those who build up a firm over their lifetime, it would not help those who repeatedly start firms, so-called "serial entrepreneurs", she added.

Mr Darling came under fire from Shadow Chancellor George Osborne after the amendments to CGT were announced.

"In the short, inglorious time you've been in office, you've only had one original idea on tax and that was a big increase in capital gains, thinly disguised as a simplification," Mr Osborne said.

Private equity

Taper relief currently allows some higher rate taxpayers to pay as little as 10% CGT on profits from the sale of assets in any unlisted company or publicly-listed firm they work for, as long as they have held them for two years.

It can also reduce the CGT liability for some basic rate taxpayers to 5%.

The changes would mean private equity bosses, some of whom have made fortunes from buying and selling companies, would no longer be able to pay just 10% on their profits.

But critics said it also meant budding entrepreneurs could be put off.

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Alistair Darling's statement

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