The Fizz! Blog

U-Turn on new CGT rules

The government has already backtracked on the changes they are planning to make to CGT.  The proposed change to CGT to a flat rate of 18%, with taper relief being abolished, was widely criticised (including by me, before they even did it!) for removing a valuable incentive to entrepreneurship.  They have announced that, as a response, they are going to reintroduce retirement relief.

Three things immediately spring to mind.

Firstly, as is so often the case, the government are reintroducing something that they themselves abolished in the first place.

Secondly, many people don't start a business with the intention of working in/on it for the remainder of their working lives.  They have the intention of building it up and selling it on.  That's fine, and represents entrepreneurship, and is to be encouraged.  Retirement relief (at least if it's similar to the old version that Gordon abolished, which kicked in when you were 50 years old) will be of little use to those people.  The prospect that I may get a tax break in 17 years time is unlikely to incentivise me very much!  So this is another ill thought out response that doesn't actually address the problem once you scratch the surface of it.

Thirdly, I can't agree with the Telegraph's assertion that the government's ability to make a u-turn when a policy isn't properly thought through is a welcome thing.  If there had been any consultation on this with taxpayers and advisers - any at all - then the unfairness of the changes would have been apparent.  But time and time again, changes are brought in, conceived and drafted by people who have absolutely no practical experience in business whatsoever, without the slightest consultation with people who might be able to point out the practical difficulties that the proposed changes might present.  That's not good enough, not only because it sends out a message that the government is indifferent to the taxpayer, but also because it's just inefficient - why not get things right first time rather than adding layer after layer of amendments down the line?

I don't like agreeing with the taxman, but...

The Telegraph claims that the failure to increase the tax-free allowance of 40p a mile for using your own car in your job amounts to a stealth tax.  Apparently the average cost of motoring is now 44p a mile and therefore "millions" of car drivers are losing out.

Now, in general I can't stand stealth taxes and am always quick to point them out.  But to claim that this is a stealth tax is rubbish.

Although lots of people will come up with reasons why this doesn't apply to them, I would suggest that nobody has to pay more than 40p a mile to run a car.  It's perfectly possible to run a car that's adequate for any more or less any purpose for less than that amount.

When I was a recently qualified accountant, I went on secondment to a client.  I drove there four days a week, a 130 mile round trip, and got 40p a mile for my trouble.  This was in 2001, I think, so it's right to say that the 40p hasn't gone up for a long while.  I calculated that, at the time, my car was costing me 15p a mile to run, all in, or something like that - petrol was cheaper then, and my servicing and repair bills were really low.  So four days a week I was being given £52 in mileage and it was costing me just £19.50.  On the basis that I was doing that 20 times a month, I was profiting by £650 a month, tax-free!  In the six months I was on secondment at that client I had more money in my pocket than I ever had before, and probably more than I did for the next few years.

The reason, of course, was that my car - while reliable - had little (almost zero in fact) capital value.  It's depreciation that is often a big chunk of your motoring expenses.  And if you are running a new or expensive car, you must accept that you are choosing to do that.  It isn't necessary, and you can't blame the government if they won't let your employer reimburse all your costs!

I am not saying that it is bad to run a new/expensive car, and that anyone driving an older/cheaper/more fuel efficient car has the moral high ground - that may be the case, but it's not necessary to sustain the point that I am making.  I am saying that you are choosing to incur extra costs, because of some non-financial benefit that - knowingly or not - you believe that the car gives you.  If you love cars, and drive a Ferrari costing you £1.50 a mile, that is absolutely fine with me - but it isn't reasonable to expect the taxpayer to subsidise it!  Bluntly, anyone who buys a new car, claiming it's because it is more reliable, or the running costs are lower than their last one is generally talking nonsense.  They just wanted a new car and are making up spurious benefits to justify it to you - and to themself.

I've done a quick back of the envelope calculation of my motoring costs for the last year.  I reckon my car cost me 29p a mile for the 10,000-odd miles I've done.  The key thing is that I reckon my car has only depreciated in value by £1,000 in the year.   If it had depreciated by £5,000 it would cost me well over 40p a mile.  But as things stand, most people could do what I'm doing and be ahead.  Clearly this isn't a stealth tax - I can completely avoid paying it!

So, I would suggest that, rather than seeing the 40p a mile rate as a stealth tax, you should see it as an opportunity to have your motoring costs subsidised by the taxpayer!  See the glass as half full, not half empty.

Northern Rock - ISAs

Apparently, a large number of people withdrew money from their Northern Rock ISAs during the panic of a few weeks ago.  Normally, they would just lose their ISA allowance for the years in question.  However, the government has announced that the savers in question are going to be allowed to put the money back into the ISA (or another one if they still do not trust Northern Rock).

I'm not sure if I think this is a good idea or not.  People have to take responsibility for their own decisions at some point, surely?  You can't always expect the government to bail you out whenever you make (arguably) a silly and ill thought-out decision.

IHT - why spin works

As you are probably aware, the Chancellor yesterday claimed that he is doubling the IHT allowance for married couples from £300,000 to £600,000.  This is a classic piece of spin - it is literally true, but utterly misleading, in the same way that a promise not to increase income tax was, literally speaking, adhered to, but ultimately meaningless given that National Insurance was increased.

Previously, the same reduction in IHT could be achieved by simple, standard tax planning - either by a couple electing to be tenants in common of the family home, or by using a trust.  All the change does is remove the need to do that bit of planning - for the well-informed it saves the need to pay some professional fees; only for the ill-informed or lazy does it save any tax.

But that is not the point, of course.  The important thing to the Chancellor is the headlines immediately after the event.  And until 6 o'clock (at least) last night the BBC were reporting that the threshold had been doubled, with no qualification at all.  On Sky News it was worse - far worse.  At 8 o'clock one of their reporters was doing a piece to camera on the subject.  The presented mentioned to him that the Conservatives had pointed out that the rule change made no difference to those who had planned their affairs properly already.  The reply from the reporter was that although the Conservatives had made some objections on the detail, what was "for certain" was that half as many people were now subject to IHT before!

This is unbelievable on two grounds.  Firstly the accurate objections to the change were just dismissed - because, I suspect, the reporter was out of his comfort zone and didn't really understand them; his piece was not exactly convincing.  Secondly, because Sky had someone covering the matter who clearly lacked pretty basic numeracy.  Even if Labour had doubled the threshold, what are the chances that half as many people would be exposed to IHT?  To put it another way, say 2 million people were liable to pay IHT before, what are the chances that precisely one million have estates worth £300,000 to £600,000, and the other one million have estates worth £600,001 or more?  Absolutely unbelievable.  Next time, get someone with a grade C in their maths GCSE to cover the pre-budget report, please!

Does the Chancellor know what "loophole" actually means?

No.  He just announced in the PBR that he is closing the "loophole" by which the private equity bosses discussed below pay only 10% tax on much of their income - by increasing the rate of CGT for everyone, not just for the private equity bosses.  So, just to be clear, the entire concept of Capital Gains Tax Business Taper Relief was therefore a loophole!  And who introduced that I wonder?  One G.Brown Esq.

From the two options I set out in the final paragraph of my previous post, Mr Darling opted for number two - increase CGT for everyone.

I find the whole thing amazing on two counts.  Firstly that the Chancellor can use the sloppy word "loophole" to describe something that he is abolishing in its entirety.  Secondly that an entire raft of legislation that has generally been seen as positive - BATR is well regarded generally - can be removed in what appears to be a headline-driven panic.  It's desparate, short-termist stuff.  Although after many years of observing this sort of behaviour by politicians of all shades, I accept that I should probably cease to be surprised.

Does anyone in the media know what "loophole" actually means?

A way of escaping a difficulty, especially an omission or ambiguity in the wording of a contract or law that provides a means of evading compliance.

The word loophole is being thrown around in the print and broadcast media a lot at present to describe the ability of private equity bosses to pay tax at a rate of 10% on some of their income.  In fact, it appears to be compulsory to describe this as a loophole.

It's nothing of the sort.  The taxpayers in question are buying businesses, increasing their value and then selling them on at a profit.  The tax system in this country says that if an individual sells a trading company after owning it for two or more years they need only pay tax on 25% of the profit.  That means that a 40% taxpayer effectively pays tax at 10% - of a million pound profit, only £250,000 is taxable, and tax at 40% is £100,000.  This is not a loophole, it's exactly how the system is supposed to work.  If you or I build up and sell on a business, we would certainly expect to take advantage of that rule.

When he introduced the rule, Gordon Brown trumpeted it as an incentive for enterprise.  In this case that appears to be exactly what it's doing.  Admittedly, some people believe that the private equity owners are doing little to improve the condition of the businesses they are buying and selling.  However, the market disagrees.  If someone can buy a business for £50 million and sell it on for £150 million then the market clearly thinks that the business is in a better state than it was.  If part of that process has been job losses then that's clearly sad for the people involved.  But private businesses aren't charities. 

If the government was to cave into pressure and change the rules - surely not, Gordon Brown would never change his mind on something, would he? - then they would appear to have two broad principles they could go with.  Option one, force the private equity owners of businesses to work under a different set of tax rules than the rest of us, because the numbers are bigger in their case.  That doesn't seem very fair to me.  Two, amend the rules so that we all pay more tax, private equity business owners and smaller scale entrepreneurs alike.  That seems unreasonable too.  We will see what the Pre-Budget Review brings this afternoon.

7 rules for communicating clearly and concisely in emails

There's a good article here about efficient emailing.  In particular, I agree completely with the idea that any email should only require one specific response or action from the recipient.  If you ask for three things, there is a fair chance that you won't get a response until all three things have been done.  If you ask for one thing, you'll probably get a response a lot quicker.  If you need three things, send three emails.  That way the easy responses can be made straight away.

A better form of Inheritance Tax

Following on from yesterday's post, I'd like to suggest a better form that Inheritance Tax could take.  As discussed, it's a good tax in that it will rarely cause hardship for the payer - even the person inheriting wealth will, in most cases, not *need* the money.

But it could be said to be a bad tax in that it perpetuates unfairness in our society - the rich stay rich and the poor stay poor.  So, to correct that, why not just tax inherited money on the recipient, treating it as just another slice of their income?  That way, the wealthy pay more on inherited funds than the poor, and there is an incentive to spread legacies out across a number of recipients, sharing the wealth more widely.

Is Inheritance Tax really so bad?

Inheritance Tax has rumbled on in the news at about the same level of interest (or lack of) for a long time now - at least six or seven years.  The Conservatives, via George Osborne, have brought it back on to the radar via a proposal to increase the threshold where IHT kicks in from £350,000 to £1,000,000. 

Now, as an aside, even with the boom in house prices, I'm not convinced that IHT is going to hit that many estates.  Firstly, IHT planning is becoming more mainstream.  Secondly, a lot of people have borrowed against their houses.  If someone borrows £300k against their £500k house as part of an equity release scheme to create some spending money for retirement, then they've slipped the IHT net.

And in any case there are some good things about IHT.  Principally, it's unlikely to cause hardship to anyone.  The person who accumulated the money and needed it to provide for themselves in retirement rarely objects, principally because he or she is dead.  If the children were hoping to inherit £1,000,000 but only inherit £740,000, then they should be pretty happy, in the view of many people.

So, I can't get too excited about IHT.  The tax revenue (well, some quantity of tax revenue anyway) has got to come from somewhere.  If the money isn't collected from those estates, it will have to be collected from someone else.  The Conservative party are proposing to collect it from "Non-Doms" - wealthy people who live in the UK but claim that they ultimately belong somewhere else and avoid paying tax on their non-UK income, unlike me and (probably) you, who must pay UK tax on our worldwide income.  Now, I would have to say that this probably isn't fair.

However, there's no need for those two issues to be associated at all - although all the newspaper articles in the aftermath of the Conservative proposal appear to be doing so.  They are entirely separate. I suspect that most people probably aren't too bothered by Inheritance Tax, but think that the minimal tax paid by the non-doms is unfair.  Well, 95% of people have no interest in either subject, but for the 5% of us that have some passing interest I'd speculate that may be the position.  Hopefully the two issues will be uncoupled and can be debated separately in the future.