Is a hike in Capital Gains Tax really an open and shut case?

IN AGATHA Christie's crime novel 4.50 From Paddington it was the doctor what done it. His motive? Soaring post-war income tax. He wanted to marry a rich woman to acquire a big capital sum, which at that time was untaxed. The problem was he already had a wife.

As Miss Marple explained: "When he thought about taxation and how much it cuts into income, he began thinking that it would be nice to have a good deal more capital."

In the half-century since Christie wrote her novel, still regularly adapted on television, little has changed. Capital gains are now taxed, but receive only a third of the blow which hits top rate income tax payers.

The new Westminster government is attempting to tackle this anomaly by ensuring that capital is taxed at the same rate as income, thereby triggering a major row.

Buy-to-let landlords, second home owners and many share investors are up in arms, claiming it could more than double their tax liability. They say it is unfair to extort the same tax on, say, a holiday home which has been in the family for 30 years, as on shares turned over in six months.

Furthermore, with more people turning to property for their pension savings, they could be hammered by 50 per cent tax when they retire.

Against this, others argue that with CGT paid by fewer than 250,000 people last year, it is a storm in a tea cup affecting only the very wealthy. Furthermore, unless it is closed down, a low rate of CGT provides scope for the better off to avoid income tax at 40 or 50 per cent, by converting income into capital gains.

Confused? No need. As Miss Marple said: "It is all much simpler than we suppose." To help unravel the puzzle, we answer your questions.

What is capital gains tax?

This is the tax which is levied not on the money you earn from your job, but from the rise in the value of any investments you hold, such as property, shares, unit trusts, investment trusts or alternative investments such as art or wine.

It is a relatively modern tax, in that it did not exist before 1965. Agatha Christie seems to have had her finger on the pulse of a controversial contemporary issue when she wrote her novel in 1957, as only a few years after publication the Wilson government introduced it at a flat rate of 30 per cent on assets held for more than a year.

The tax trundled along in this form largely unchanged, apart from an annual increase to a personal allowance, until Nigel Lawson's tax-reforming budget of 1988, when he cut the top rate of income tax from 60 per cent to 40 per cent.

At the same time, he ruled that gains on capital, such as property and shares, should be taxed at an individual's highest rate of income tax. This pushed up the top rate liability from 30 per cent to 40 per cent.

However, he wiped out all gains accrued before March 1982, and with it the requirement to pay eyewatering amounts of inflationary gains accrued during the 1970s. Further taper relief, followed by indexation, allowed for assets to be uprated in line with inflation before tax was due. This avoided an unfair penalty on those who held investments for a long time, the value of which had merely ticked up in line with rising prices generally.

This system remained in place until 2007 when it was reformed again by the then Chancellor Alistair Darling. Indexation ceased, but CGT was charged at a flat rate of 18 per cent.

So you could end up paying 50 per cent tax on all your profits on shares or property?

Not everything, no. You get a personal allowance annually which is exempt. At 10,100 currently, this allows a married couple to take 20,100 annually without paying any tax. For most private investors, this is adequate to realise even a substantial investment portfolio over a few years without paying any tax.

Property is a bigger problem. If you have owned a second home for 20 years and paid off a mortgage, when you come to sell, whatever the difference between the price you bought at and the price you are selling at will be added to your income, pushing most people into the 50 per cent bracket. This means the taxman will take a huge chunk of your gain.

Must I pay CGT when I sell my home?

No. Although property gains are subject to CGT there are a number of exceptions, of which your home, known as your principle private residence is one. However, any second property such as a holiday house, buy-to-let or a family home which is given to you but you do not live in will be caught.

Can I flip my home like the MPs?

Possibly. Under the existing law, it was possible to own two homes, or indeed even three, and provided you can prove you have lived in your second home rather than your "main home" for some months, then you could switch your principal private residence exemption across, and switch it back later. Thus you can avoid any tax on either, or indeed even more than two homes.

The ability to switch was introduced as an exceptional concession to help people forced to pay high rates of CGT unfairly, because they ended up with two homes through no fault of their own. This might include people forced to move for their job, who had to buy a new home before they were able to sell their old property. Similarly, where couples are getting married and both owned a property, it allowed one partner to move in with the other without finding themselves liable to CGT on their original home.

However, MPs are among those believed to have abused the exceptional nature of the concession by repeatedly switching, or flipping, their designated principal private residence to maximise profits from the sale of the property, which had often been done up at taxpayers' expense. As a result, it is likely any reform of the tax will clamp down on this concession.

Can you shelter investments from CGT?

Yes. You can invest 10,200 via an Isa annually. Alternatively, investments in pensions are also CGT-free.

That seems fair. What's the row about?

Mainly the lack of any allowance for inflation. Many criticisms would be silenced if an element of the old taper relief or indexation were introduced.

Is there a silver lining?

Yes. We don't have full details of their thinking, or indeed the date when the new regime will come into force. It is possible that the government will introduce an element of indexation. If not, it is unlikely any new regime will begin before next April at the earliest. The time delay will allow anyone with a big gain on either shares or property to dispose of their assets.