28% Capital Gains Tax - Whatever Next!

So the new Chancellor has stood up on the bridge and pushed on the big lever labeled "Capital Gains Tax", moving it forward to read "28%", but hasn't pressed the "taper relief" button. So what's going to be the effect down in the engine room?

Well from the property point of view, probably not that much. The rise in CGT is less than the intimated hike of 40-50% being suggested just a few weeks ago and with the change being effective from midnight tonight, there won't be many sales being completed to try to beat the deadline. If anything, the deadline is more interesting than the rate change. If George Osborne had introduced a time delay then we may well have seen some speculative investors looking to offload their properties thereby increasing the supply of properties available to buy and putting downward pressure on housing inflation. This is something the new government had suggested in it's manifesto but this part of the budget doesn't tally with that.

Nevertheless, a steadily increasing housing market is good news for the majority of investors who plan to hold their property assets for a longer term. And history tells us that this new rate will most likely change again. Why? Because CGT is less than 50 years old, but since it's inception in the 1960s the regime has been changed a number of times.

It has been at the same rate as income tax, lower than income tax, inflation allowances have been introduced, inflation allowances have been withdrawn, "taper" relief given according to the time an asset is held and different rules applied for different assets. So if you're not planning on selling before April 2015 (just after the next pre-general election budget!) then today's announcement may well be somewhat irrelevant to you.

What this new rate does tell us if we read between the lines is that this government seems to be moving towards a self-funding pensions system. Chancellor Osborne opted to keep £10,100 per year CGT-free allowance, despite concerns that this would be cut dramatically. And prior to the flat CGT rate of 18% rate introduced in April 2008, the lowest rate you could hope to pay was 24% for assets held longer than 10 years, with the top rate at 40%. So a flat rate of 28% which is supposedly part of one of the toughest budgets seen in years seems comparatively low.

Perhaps the most interesting outcome of today is John Redwood's recommendations for CGT. In a letter to Mr Osborne, the ex-cabinet minister and Chairman of the Economic Competitiveness Group who is also one of the key tory tax advisors to the new chancellor, has urged for a taper relief system to be introduced which would see assets held for five or more attracting a CGT rate of "zero"!

If you had any thoughts about selling, this particular snippet might just cause you to re-assess your strategy. It may also cause many investors to enter the private renting sector to take advantage of the rising market, especially if there is strong speculation that the profits from doing so could soon be tax free. HMS Goverment's course and speed is certainly a little less foggy than it was this morning!