Capital Gains Tax: Buy-to-let property owners win as tax rate falls to 18 per cent

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The Government is pushing ahead with controversial plans to shake up taxation on capital gains, despite complaints from the small business community that the measures will hold back entrepreneurs.

Chancellor Alistair Darling confirmed yesterday that the Government will abolish taper relief on capital gains tax and introduce a flat taxation rate of 18 per cent on the sale of all business and non-business assets.

The legislation will come into force on 6 April.

The move had initially been proposed to target the private equity industry, following the infamous comment – and subsequent public outcry – by one senior buy out figure that he paid less tax than his cleaner. Private equity often paid less tax through avoidance schemes such as classifying profits as capital gains rather than income, which took advantage of taper relief. The decision to introduce a flat rate of capital gains tax will have unintended consequences especially among entrepreneurs in the UK who will see their taxes soar from 10 per cent, according to Steve Gilder, a partner at PricewaterhouseCoopers.

He said: "Entrepreneurs are wealth creators and they are being disincentivised to create and sell more businesses as the level of tax rises.

"The big winners will be property owners in the buy-to-let market, as their tax rate will fall dramatically."

The measure creates winners as well as losers. Landlords in the buy-to-let property market, for example, have traditionally paid a rate of tax between 24 per cent and 40 per cent when selling a property. "There will probably be a rush of property sellers on 6 April," Mr Gilder added.

The Treasury has made concessions to its original capital gains tax reform package announced in October's pre-Budget report by announcing it was to establish a new relief for entrepreneurs.

Businessmen and traders will qualify for a capital gains taxation rate of 10 per cent on the sale of businesses or assets worth up to £1m.

That will be a cumulative "lifetime limit"; more than that and the taxation level reverts to 18 per cent.

This translates as a potential lifetime tax benefit of £80,000.

One analyst said that the move had done little to prevent a trend of shareholders and small business owners looking to sell up before the April deadline.

Mr Darling said that the move was part of a strategy to simplify the tax regime. Mr Gilder said: "Simplicity is not a bad principle, but it should not be brought in at the expense of entrepreneurs.

"They create wealth, which in turn creates employment. If their incentive is not there, you could see stagnation."

Tony Cohen, head of UK entrepreneurial business at Deloitte, said: "On the whole, the Budget contains some positive measures for entrepreneurs in the UK although they fall well short of what was taken away in the pre-Budget report through the abolition of taper relief and the changes in the treatment of non-domiciles."

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