Increase in Capital Gains Tax
David Boyd, Managing Director, PAD4U Letting Agents Manchester writes:
The welcome news that Home Information Packs are likely to be scrapped by the new coalition government in the upcoming emergency budget has been sidelined by the very unwelcome news of a doubling of Capital Gains Tax.
One of the Liberal Democrat's Manifesto pledges to readjust Capital Gains Tax in line with income tax may see Capital Gains Tax as high as 40% with perhaps no adjustment for how long the asset has been held nor taking account for inflation during the period of the gain. The increase is squarely aimed at wealthy individuals who pay less tax on monies earned from capital gains than say a low paid worker will on their salary. This situation was created when Gordon Brown unexpectedly cut Capital Gains Tax to 18% which is lower than the 20% income tax band.
However, like many of the Liberals' policies they have not been thoroughly thought through. Perhaps even the most bullish Liberal Democrats could not have believed the turn of events that would see many of their policies actually being implemented in the real world. To understand why such an abrupt turn of policy regarding Capital Gains Tax could be damaging and unfair to many hard working people, we have to look back in time.
The collapse of Equitable Life wasn't the start of a collapse in confidence in pensions and pension providers, but it was perhaps the peak of discontent with the pension system and also with the Government who were championing private pension schemes whilst the more generous guaranteed salary schemes were becoming a thing of the past. When Equitable Life collapsed, millions were wiped off people's pensions and to their utter shock the same Government that recommended such pension plans and whose regulatory bodies such as the FSA approved Equitable Life right up until it's collapse... no compensation was offered to them. It was as if millions of pounds had suddenly disappeared and those who had done the right thing and saved for their retirement, were cast adrift by the Government and their nest eggs destroyed through no fault of their own. Compensation is still being sought and the new Government has at least indicated it will do something. However for many it will be too little, too late and they will have lived out their remaining years without the pension they had saved for. Equitable Life wasn't the only catastrophe to hit the pension industry, but it was perhaps the biggest. Pension mis-selling was rife and many other smaller pension providers were collapsing also.
But what has this got to do with Capital Gains Tax? The answer is after the collapse in confidence in the pension industry and regulatory bodies and Governments all of whom could no longer be trusted with our retirement planning , property investment became not just for the very wealthy, but virtually for anyone who had any hope of not relying on state benefits for their retirement. In many people's mind property was something tangible. It couldn't turn into nothing and disappear such as their pensions had with Equitable Life. Little wonder that a cultural change had taken place. People felt they had nowhere to turn for the retirement planning but to invest in tangible assets such as property and take control of their own pension provision. And this is the crucial point that the Liberals have misunderstood. Property is no longer the domain of the supper rich or upper classes; landlords are butchers, hair-dressers, tele-sales staff, all ordinary people trying to take control of their retirement planning. Of course there are very wealthy landlords with hundreds of properties, but they are very much the exception. PAD4U manages hundreds of properties, but our average landlord only has 1 or 2 properties.
Perhaps Gordon Brown had realised the above and given he had failed to provide for peoples' pensions, that the state pension had failed, that the financial regulatory system had failed to protect people, he decided to reduce Capital Gains Tax to 18% in recognition of the fact people had no choice but to take control of their own pension planning. Whether this decision was right or wrong is debatable, however, actions have consequences and people have a right to plan their lives based on what the Government has decided without expecting a complete U-turn within a few years. The argument that it was 40% before so it can be 40% again is a particular naive one. A lot has changed since then.
It is perhaps this last point which makes me so angry about the changes being proposed. Capital Gains Tax increases are in effect retrospective. Compare this to the proposed increase in VAT of 2.5%. Firstly it is a small rise (still an unwelcome one), but we have the ability to alter our behaviour in response to this tax increase. We can spend less perhaps or put off larger purchases until absolutely necessary, etc. Now let me propose something different. Say my policy was to double the VAT rate and not only that, I will charge the extra VAT not only on the purchases you make in the future, but also the purchases you've made in the past: say that new television or new washing machine you bought last year? This is effectively what would happen if the proposed doubling of Capital Gains Tax was to go ahead.
When I write this I think back to the Conservative poster showing Gordon Brown and saying something along the lines of '...I've wiped billions off your pensions please let me do it again...'. The irony and sad truth of the matter is that it looks like our new Government is likely to do exactly the same thing. Having forced people to take control of their own pension plans due the previous Government washing their hands of this responsibility. By doubling the tax on Capital Gains, they will wipe out ordinary people's pensions yet again.
Of course this is the worst case scenario and I hope that either the rise will be more measured or taper relief/indexation for inflation will at least be implemented in tandem with the planned increase. My advice, however, is not to panic. We await the details of the actual increase as there is a lot of pressure on the Chancellor and I expect that a more measured policy than that proposed by the Liberal Democrats will be implemented in the end. Also, the long term investor should look beyond a 5 year Government term wherever possible. I will watch with interest what is actually implemented and report back to you with my thoughts and advice.