Tame increase in CGT brings cheer to City

CHAMPIONS of enterprise breathed a sigh of relief yesterday as chancellor George Osborne stopped short of fully bowing to Liberal Democrat plans to raise capital gains tax (CGT) in line with income tax.

Osborne used his inaugural Budget to introduce a new 28 per cent rate of CGT for higher-rate taxpayers, effective from midnight last night. The move was a far cry from the draconian measures favoured by the Lib Dem camp, who had proposed raising CGT up to 40 or even 50 per cent. Under the new proposals, CGT for low and middle income earners will remain at a flat rate of 18 per cent. Osborne said the CGT?changes would affect just 100,000 people.

The Treasury hopes to raise almost £1bn per year by 2014-15 with the higher levy, though its forecasts show that the majority of that figure is likely to come not from the CGT increase itself but from rising income tax revenues, as taxpayers are discouraged from disguising income as capital gains. Next year, out of a projected revenue increase of £725m, it expects £600m to come from higher income tax receipts.

Osborne also heralded an extension of the CGT relief currently available to entrepreneurs on the first £2m of gains made over a lifetime, with the reduced 10 per cent rate now applying to £5m of lifetime gains.

But tax experts warned that the enterprise relief measure did not go far enough to balance out the increased top rate.

Chris Sanger, head of tax policy at accountancy firm Ernst & Young, said: “What does concern me is the effect on serial entrepreneurs investing time and time again, which is what this country needs to strengthen the economy. The fear is that they will hit the £5m limit pretty quickly and then go to other countries where rates are lower.”

However, there was jubilation in the financial spread betting community after Osborne declined to alter the rules to catch spread betting profits in the capital gains net.