Chancellor's new CGT proposals leaves British business distinctly unimpressed

On Thursday, the Chancellor announced changes to the Capital Gains Tax regime to take effect from April 6th 2008.

Originally, the current CGT taper relief scheme was to be replaced by a single 18% flat rate tax on business asset sales, but the Government has backtracked in the face of strong opposition from business groups.

From April 6th 2008, individuals will now be liable to a 10% CGT rate on the first £1 million of business asset sales during their lifetime. The 18% rate will apply on amounts above the £1 million mark.

Clearly, this new system is an improvement on the original Pre-Budget Report proposals, but many leading business organisations are not impressed. The £1m figure may sound like a lot, but if viewed as a "lifetime allowance" for entrepreneurs, it seems far less attractive. Several point out that the relationship between British business and this Government has also been badly damaged over the past few months.

The Federation of Small Businesses (FSB) welcome the Government's u-turn, but criticised how the who CGT issue has been handled. National Chairman, John Wright said:

“The entrepreneurs’ relief he announced today is close to the proposals we put forward at the end of last year. They will go some way to protecting entrepreneurship in the UK as well as benefiting small business owners planning to pay for their retirement with the sale of their businesses.

“We welcome these plans, but the way in which the whole issue has been handled has seriously eroded small businesses’ trust in the Government. There has been huge uncertainty about what small businesses’ tax liabilities would be from April 2008 and this has made planning for the future very difficult. Even now small business owners have very little time to prepare before these new changes come in.”

Miles Templeman, Director General of the Institute of Directors (IoD) said:

“The government has listened to some of our concerns and the new relief will benefit many small businesses. Of course we welcome that, but there will still be a very large tax hit on business overall."

“We do have specific concerns. The lifetime limit will be a constraint on serial entrepreneurs. The distinction between business and non-business assets will retain an element of complexity. And the fact that there will be no fully exempt gain means that complicated calculations will still be needed in all cases. Furthermore, the relief will be significantly less generous than the old retirement relief, when we take into account the loss of indexation allowance and inflation since 1998."

"We are disappointed that the Chancellor has ruled out a delay in implementation. There are only ten weeks of the tax year left, which does not give businesses much time to plan their affairs. A delay of a few months would have been very helpful."

Richard Lambert, Director-General of the Confederation of British Industry (CBI), also pointed out that although £1 million might sound a lot, it could have been built up over twenty or thirty years. "It is clear that the real wealth and job creators of the UK's economy, selling assets for a lot more, will be seriously clobbered."

"Today's changes still discriminate against the long-term holding of assets, in favour of short-termism, and will do nothing to restore stability to the life insurance market, which faces a period of turmoil."

"The bottom line is that the reaction of the UK government, in the face of an economic slowdown, has been to slap on a major tax hike of £700 million. This will have a damaging effect on job creation, investment and savings at exactly the wrong time in the economic cycle."

"This tax hike has been badly handled from start to finish. It was rushed out without consultation and there has been precious little since, despite the interminable wait for these revised plans. To be given ten weeks to make major business decisions is simply not reasonable."

"The relationship between Government and business has been damaged by this affair and will take time and effort to rebuild."

We'll continue to report business reaction to the Chancellor's new CGT proposals over the coming weeks.