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CGT rise may 'hit' business investment

Government plans to increase the rate of capital gains tax on non-business assets could, nevertheless, have a negative impact on businesses, it has been argued.

The Institute of Directors (IoD) has claimed that proposals to lift the CGT rate, currently at 18 per cent, to a level closer to that of higher rate income tax could be counter-productive as a revenue-raiser because many shareholders and investors will simply avoid selling.

The IoD backed the case for tapered relief so that the longer that assets are held, the lower the rate of tax chargeable on a sale.

Under the IoD plan, the whole gain could be taxed when an asset had been held for less than a year, 80 per cent of the gain when it had been held for one to two years, down to 20 per cent when the asset had been held for at least four years.

If such a plan were not possible, the government should consider ensuring that all shares held by directors and employees qualify for entrepreneurs' relief and also charging reduced rates on other shares.

However, the relief as it stands would require changes for this to be effective, the IoD continued.

Entrepreneurs' relief is limited to directors and employees with holdings of at least five per cent. The five per cent rule dissipates relief, the IoD argued, where shares are widely distributed among directors and employees, or where the company has attracted outside equity capital so diluting the stakes of the directors and employees.

For that reason, the five per cent rule should be dropped, in the IoD's view, with all shares qualifying for the relief.

The IoD proposals also included steps to accommodate the risk of some investments.

Although the CGT regime does include relief for losses, quirks of timing can delay relief for years.

What's more, the IoD said, gains on shares are equivalent to dividends: the payment of a dividend before a sale reduces a gain, and non-payment increases it. So when gains on shares do not qualify for entrepreneurs' relief, the rates should be set below the rates that apply to net dividends (0, 25 and 36 per cent instead of 20, 40 and 50 per cent).

Reduced rates would help people who had built up share portfolios for their retirements and who needed to switch from shares to gilts as retirement approached.

Miles Templeman, the IoD's director general, said: "Making sure that changes to CGT do not stifle enterprise or have an adverse impact on investment in shares is a key test of the government's pro-business credentials.

"The new government says that it cares about the impact of the tax system on enterprise. It will now need to prove it."