Proposed capital gains tax changes prompt investor worries

Plans by the new government to increase capital gains tax in certain instances so that it more closely matches income tax have raised concerns among investor groups.

The government intends to tax non-business assets at a rate above the current 18 per cent and much nearer the higher rates of income tax, which could push CGT up to 40 per cent or 50 per cent.

The National Landlords Association (NLA) has urged the government to clarify whether buy-to-let properties will be categorised as business assets. In which case, sales would qualify for the lower CGT rate.

David Salusbury, the NLA's chairman, said that a CGT increase would "act as a barrier to further investment in residential property".

Some experts in the market have been predicting that the change could herald a sudden surge in the numbers of buy-to-let properties that are put up for sale.

Fears exist that individual stock market investors could also follow suit and sell their assets in order to take advantage of the present 18 per cent flat rate.

Narrowing the differential between CGT and income tax could see people in higher tax brackets capitalising on their gains ahead of the emergency Budget.

The British Private Equity and Venture Capital Association (BVCA) counselled caution on any rise in CGT rates.

Simon Walker, the BVCA's chief executive, said: "We would caution against the assumption that any increase in CGT that could be used to reduce taxation elsewhere. The BVCA will, therefore, be actively engaging with ministers to urge them not to make any hasty decisions in this complicated area."

CGT only raises about £3 billion annually in government revenue, and an increase in the rate charged on non-business assets is unlikely to make a substantial contribution to reducing the budget deficit.

Its primary purpose would be to prevent the conversion of income into capital and the exploitation of the gap between income tax and CGT.

The government has not made clear when any change would apply. It is possible that the new tax, when it is detailed in the emergency Budget, could be backdated to 6 April 2010, although such a move would be unusual.