Thursday, 24 January 2008

Crazy changes to CGT

So now we have Darling's new CGT proposals. Basically he's amended his proposals so that the first £1m of any gain in your lifetime is taxed at 10% (as before) rather than 18% (as proposed). But, apart from the lifetime limit (more later), there are other limitations. Like you have to hold more than 5% of the equity (and voting rights) in a qualifying private company and be a director or employee. Very, very few employee shareholders will therefore qualify.

Bluntly, I think the whole situation is crazy. As I have said before, I campaigned long and hard in 1996-1998, with Kenneth Clarke and then Gordon Brown, to get the CGT rate reduced. I publicly said that I thought the 10% rate after 2 years was one of, if not THE, most 'entrepreneur-friendly' measures introduced by any Government. Before that, many of my friends moved abroad to avoid tax when they sold the businesses that they had worked a lifetime to build up. I, myself, benefited from this new CGT regime in 2000 and again in 2006. But so did hundreds of people who had worked for Richard Holway Ltd and Ovum.

Since then I have invested some of the proceeds in AIM companies, start-up private companies and new ventures - all with the expectation of a 10% CGT rate when I eventually sold up.

But I've used up my £1m lifetime allowance. So I guess I'll have to pay 18% on anything I may make for now on. Even if I hadn't (or the rather vague details of the new CGT regime means that my "lifetime' starts again from zero on 6th Apr 08), my AIM investments are not over 5% . I'm reluctant to become either a director or employee in the private companies in which I have invested. I prefer to be a 'mentor'. So none of the things I do as a 'serial entrepreneur' qualify!

So I might as well invest in property and short term stock exchange investments. What an absolutely crazy situation!

Even if I hadn't used up my £1m lifetime allowance, many of the very bright entrepreneurs I know will certainly be hoping for a much bigger gain than £1m. I am absolutely certain that many will now consider moving abroad, as 18% is really worth saving whereas 10% was both fair and perhaps not worth all the upheaval and accountants bills to avoid! As before, surely it was better to raise 10% than nothing at all?

Of course, this all applies to employee shareholders with SAYE schemes, share options and smaller shareholdings. They are all similarly penalised with an 18% CGT rate.

When Darling announced the original scheme back in Oct 07, it looked as if it had been made up 'on-the-back-of-a-fag-packet' as a means of raising the funds required to produce a counter-measure for the Tories' very popular Inheritance Tax proposals. All this because a General Election was in the offing.

I always thought that Ministers had enormous departments who worked on the details of such Budget proposals and went through all the resulting consequences? Clearly (given the 'U-turn' yesterday) this didn't happen and "incompetence" - the 'term of the moment' - seems an apt description.

I really am not a political animal, but my confidence and trust in the economic abilities of the current Government have evaporated.


Steve said...

As you say entrepreneurs will:
- either seek out tedious and convoluted tax 'mitigation' schemes
- or simply go and create businesses and jobs abroad

Ironically, as they move through the airport en route to better locations, they will pass the influx of incoming, non-contributing non-doms for whom the UK is now an offshore tax haven.

It all makes perfect sense.

Richard Holway said...

Chris Martin sent me this email which he has agreed for me to publish.

Hi Richard,
I am an avid HotViews reader now and I am spreading the word to other
entrepreneurs.  I was struck by your CGT thoughts today. 
When I decided to make my career in the entrepreneurial world of technology
start ups and early stage companies I was attracted by the potential to make
capital gains.  Unfortunately the investments and exits I have made to date
have always fallen foul of changes in CGT, BES, EIS, taper relief and the
multitude of other tax changes.  I have started businesses that I have had
to move to the USA due to the red tape in the UK, not so much the tape as
the obfuscation, interminable delays and constant goal post moving of the
regulatory framework.
It is politically expedient to make bricks and mortar the only high
performance long term asset however we can’t compete with the well educated
thrusting Chinese and  Indian youth who are emerging as the engines of
tomorrows global economy with our houses. Our pensions, our children’s jobs,
their security and prospects all depend on the UK having an environment
where it is worth investing in building the content, business models,
automated services and community markets of tomorrow. Now, as we face a
turbulent geopolitical, energy, environmental and financial period in
history we need to reward the modern day explorers of new frontiers and
builders of future wealth.  These individuals must be confident that they
will be able to reap their rewards many years in the future. 
I seems that when he entered office Brown understood this and made policy
decisions accordingly, which I applauded.  Why then has he lost the plot?
Best regards
Chris Martin

Richard Holway said...

I have received an email from Stephen Timms MP who was the small business minister up until a few days ago (hence my interest in his views!)


Thanks for the feedback. I will be watching views on this with interest (and would watch more closely if I had not just been reshuffled back to Dept for Work and Pensions!) As you will have seen, small business reactions have been quite favourable. It does mean a significant additional incentive for actual entrepreneurship, which I think will have some benefits. You raise an interesting question about when the clock starts ticking for the £1 million - I will look out for an answer.

Best wishes,