Foreword

During the fever of ‘the election that never was’, on 9th October last year the Chancellor Alistair Darling (now twice voted Britain’s most boring politician) announced that a number of changes to the capital gains tax (CGT) regime would be made in the Finance Act of 2008.
The new rules, were billed as ‘simplification’ but we knew immediately that we could bin all that crazy stuff about the ‘alignment’ of taxes and that further ‘complication’ was on the way.
He cunningly failed to let us have the full details until much more recently. He was still ‘consulting’ apparently.
In any event, after checking exactly how much extra tax he would need to pay for the university fees of MP’s children, his new sit on eyebrow mower and St Tony’s election as Holy European Emperor we now have them.
The main changes are as follows:

Withdrawal of indexation allowance;
Withdrawal of taper relief;
Introduction of a single tax rate of 18 per cent for all disposals of chargeable assets by an individual.

The loss of inflation linking presumes that inflation is not a real problem anymore. History suggests this is invariably a great mistake. Inflation never dies but just goes into periodic hibernation. But the detail of tapering relief was always rather hard to remember so perhaps that’s better news.
The annual exempt amount (£9,200 in 2007/8) will remain and for many people (for example, holders of non-business assets who currently pay CGT at rates of between 24 per cent and 40 per cent) the introduction of the new 18 per cent rate will be most welcome if seriously ‘unaligned’.
Again the lesson of history is that there will now be a rush to buy assets which generate readily realisable capital gains as opposed to those which create income type streams. This was something which distorted capital markets until CGT was first introduced in 1965 to help level the playing field as well as to raise extra revenue.
Following representations from the business sector, in January 2008 the Chancellor announced that a new relief, known as ‘entrepreneurs relief’, would also be introduced on 6 April 2008. The relief will give those who qualify an effective CGT rate of 10 per cent in respect of:

Gains made on disposal of all or part of a trading business;
Gains made on disposals of assets within the three years following the cessation of a trading business.

The relief will be restricted to a lifetime allowance of £1m of gains per qualifying individual. This is rather strange as it implies that business angels and serial entrepreneurs are to be penalised for being too successful. Gains in excess of the allowance will be charged at the standard 18 per cent. To qualify for the relief, a person must meet the qualifying conditions for a period of at least one year. There is no minimum age limit.
In cases involving the disposal of shares or securities in a trading company, the conditions are that the individual making the disposal:

Has been an officer or employee of the company or of a company in the same group of companies; and,
Owns at least five per cent of the ordinary share capital of the company and that holding enables the individual to exercise at least five per cent of the voting rights in that company.

This rather penalises small shareholders for no apparent reason. More generally however in eligible circumstances, full or partial relief may also be available in respect of an associated disposal, for example, if at the same time as the shares are disposed of the individual also disposes of the premises from which the company carries on its business.
Importantly trustees may also qualify for the relief where a beneficiary of the trust has an interest ‘in possession’ relating to the business assets in question, and (where the disposal is of shares or securities) is also an officer/employee of the company. The trustees and the beneficiary will be deemed to ‘share’ the allowance in these circumstances. On the whole an 18 per cent rate sounds like good news but the structure of the new CGT regime is not entirely coherent and is likely to create imbalance and anomalies in the ways people invest.
Speaking of investment, it appears that client’s, currently ailing, trust fund values might truly have something worse to fear from exposure to all those exciting ‘emerging markets’. (See ShanghaiDaily.com 6th February 2008)
Tony Tan, a Chinese astrologer at the Harmony Academy of Chinese Metaphysics, recently advised the press that he was feeling very negative about 2008, the Year of the Rat. ‘Just like a rat, investors will have to be nimble’ and there were also ‘clashing elements’ of water and earth which would (naturally one presumes) make it worse.
He suggested Chinese investors should load up on commodities, medical and transport stocks ‘citing their favourable elements in this lunar year.’ But they should avoid April because it was ‘dangerous’ unlike his advice one presumes.
Apparently the self confessed market fortune teller was, until recently, ‘a former broker’ at a well known securities house in Singapore. Apologies to other trust advisers who adhere to more regular principles of best practice, such as charting, stock aura visualisation, stock picking, market timing, pinning the tail on the FTSE, snake charming and so on.
Call me ignorant but to me the advice given would seem more soundly based if the ancient principle that ‘what goes up must come down’ was being used. But I shall not quibble or grumble more. Felicitous greetings and may all your capital gains be huge ones.

David Coldrick, Consulting editor
david.coldrick@wrigleys.co.uk

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