Wednesday, January 16, 2008

CGT Shambles

Might as well give this currency expert a go

The current shambles surrounding Capital Gains Tax is a classic of bungling micro management, arbitrary government, and terminal dithering.

During Labour's aborted election fiasco last October, Bottler and Darling rushed forward the Pre-Budget Report by a couple of months. The result was that its measures were even more half-baked than usual.

The real humdinger was the change to CGT. Pressured from all sides to stop the exploitation of Bottler's own half-baked CGT changes by those evil private equity guys (see previous blogs, eg here), Darling announced a single flat rate of 18%.

A quick recap. In 1998 Bottler introduced so-called taper relief for CGT, which reduces your CGT liability according to how long you've held the asset. The idea was to incentivise genuine long-term investment rather than short-term trading. So if you sell your asset in under two years, you're taxed on the whole gain at your top marginal rate. But as you extend the holding period, the proportion of the gain subjected to tax is reduced. At the limit it goes down to 10% (immediately after the initial two years in the case of "business assets").

The unintended consequence was that private equity players, some of the very highest earners in the land, pay only 10% tax (see this blog for the ineffectual hypocritical splutterings of the Treasury Select Committee on the subject).

So Darling acted. Henceforth all of Bottler's ridiculous complexity would swept away, and everybody - including those equity gzillionaires - would have to pay the same simplified... ohhh... what shall we say... 18% rate. Pretty well made up on the spot.

The complaints started immediately. Because as well as catching the equity guys, the new 18% rate would also hit genuine long-term investors, who'd believed they'd pay only 10%. In particular, it would catch all those hardworking small business owner/operators, who beaver away for a lifetime, building their businesses, and for whom the value of the business is their pension fund (eg the Village Postmaster).

Big businesses (eg the CBI) are also jumping up and down, pointing out that arbitrary flip flops in tax policy undermine Britain's claim to be business friendly: high taxes are bad enough, but tax uncertainty is an investment killer.

Freaked by the universally hostile reaction, Darling promised to reconsider. He said he'd come out with revised proposals before Christmas.

Needless to say, nothing has appeared. Even though we're now less than three months away from implementation.

Just as Bottler is floundering at No 10, so Darling is totally out of his depth next door. Thrashing around with the Crock, dithering over CGT, and desperately trying to patch up his predecessor's leaky fiscal boat.

The long-term damage to Britain's economy can only be guessed at. But it will be big.