As expected, the Chancellor climbed down in large part over his proposed changes to the Capital Gains Tax system.
What was proposed was a) withdrawal of taper relief, b) withdrawal of indexation relief and c) a change in the rate of CGT to 18%. The aim was to placate trade unions by increasing the rate of tax paid by private equity investors from 10% to 18%. However, the collateral damage was a similar increase in tax paid by all those selling their own businesses. In effect, it was an 80% increase in tax for entrepreneurs.
So, the change we now have is an extra relief known as Entrepreneurs' Relief. Changes a), b) and c) above still stand - reversing the proposed changes would be too damaging politically and would never happen; you always get more rules, never fewer. The effect of Entreprenuers' Relief will be that the first £1 million of gains made on the disposal of businesses by someone in their lifetime will effectively be taxed at 10%.
The legislation actually isn't as simple as this; the gain is tapered by 4/9ths before being taxed at 18%. But the effect is to tax it at 10%. In effect, for the disposal of many - probably most - small businesses, the tax bill is now pretty much the same as it would have been under the old rules - because of the interaction with the annual exemption, the bill will be a little higher, but not cripplingly so.
There was some fear that the sudden withdrawal of taper relief would lead to some business owners scrambling to dispose of their businesses before 5 April to ensure a low tax bill. These changes do mitigate the hike in tax on the horizon, so a speedy sale of a business is unlikely to be so important now. However, the new system still involves the abolition of indexation allowance, so it may be that those who have owned a business for a very long time will still want to take some action before 5 April to "bank" that indexation, perhaps by a transfer of their interest in the business to a spouse.
Overall, it's hard to describe the process by which we've arrived at this point as anything other than a shambles. Radical rule changes, designed to curry favour before a possible election, announced with absolutely no consultation, then radically altered when almost everyone complained, and all coming into effect with only a couple of months' notice. I think Vince Cable summed it up best: “The Chancellor’s climbdown on Capital Gains Tax reform was inevitable and is a stark demonstration of the pitfalls of making up tax policy over a weekend. The truth is that Capital Gains Tax does need reform, but it must be done through full and open consultation with business, not written on the back of a fag packet in a bid to pull together a snap election manifesto."
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