Changes to capital gains tax regime could hit long-term savers

THE coalition government is on the verge of an achievement that many savers and investors felt impossible – making them reflect more fondly on the previous administration than they could ever have imagined.

The emergency Budget is still over two weeks away and the expected changes to capital gains tax (CGT) will almost certainly be introduced no sooner than next April. Yet advisers all over Scotland are being inundated by calls from clients starting to panic about the implications of a rise in CGT to re-align it with their income tax rate, a move that for many could mean an extra 32 per cent CGT liability.

Similarly, many accountants and advisers are irresponsibly bombarding clients with letters and e-mails warning them of the consequences of higher CGT, even before we know when and exactly what will happen.

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The increase in the rate of CGT is not the bone of contention, however. The proposed rise would merely return it to the level of two years ago, before the Labour government introduced the flat rate of 18 per cent. The arguments of second home owners in particular bleating about paying higher CGT next year are undermined by the fact that, if they bought their assets more than two years ago, they did so in expectation of a CGT rate in line with income tax anyway.

The real issue is the annual CGT allowance. The Lib Dem proposal is to slash this from 10,100 to 2,000 – a kick in the teeth for millions of normal savers and investors. It doesn't make sense politically or even in terms of spending cuts, given the desperate need for individuals to take up the long-term savings slack. Compare the revenue from the individual taxes – while CGT raises 2.5 billion a year, income tax, national insurance and VAT produce more than 300bn in total.

There is a misconception that CGT hits only the wealthy, based on the perception that it's all about second homes and buy-to-let, but targeting the annual allowance would take it well and truly out of that realm. Research by the Centre for Policy Studies found that three quarters of people believe minimising the tax burden on long-term savings and investments should be a core government policy aim.

However, by cutting the allowance the government would be sending a message to average earners making their own long-term savings provisions – you're as much a target as wealthy investors and second-home owners. The long-term consequences of failing to make a clear distinction on 22 June in favour of normal savers would be disastrous.

There is evidence that property investors and second-home owners are looking to sell up before the CGT hike comes into force, almost certainly next April. A large influx of sellers will finally tip a delicately balanced housing market characterised by low transaction levels in favour of supply. The reverse was the case last year, when demand outstripped supply, driving prices upwards. Oversupply will have the opposite effect.

And prices need to go down. While many homeowners expect prices to continue rising, the prevailing view among overseas observers with an eye on UK property is that it remains overpriced. Overseas buyers are a big influence on the high-end property market in Scotland, particularly Edinburgh, and as prices soften and the pound weakens further – particularly against the dollar – they will return in greater numbers.

They also believe, instructively if with some self-interest, that sellers continue to be unrealistic, and at the end top end of the market in particular, that is almost certainly true.

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