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The uproar over Alistair Darling’s capital gains tax changes continues to grow.
The Telegraph reports that “business leaders have lost confidence in the government’s ability to run the economy” following the pre-budget report, citing a poll of 255 London-based business people.
I’d like to have known how many actually had faith in the government before the poll. I’d also like a list of their names so I could make a mental note not to invest in any business run by someone who ever believed that Gordon Brown was good for the economy.
Indeed, Mr Darling’s changes are actually good news – in that they unravel some of the ridiculous complexity that his predecessor has inflicted on the tax system…
The capital gains tax (CGT) changes have been extremely controversial, with a huge outcry from business interests in the papers. The big issue is the fact that CGT on the sale of business assets will now be charged at 18% rather than the 10% which once would have kicked in after a two-year holding period.
But this outcry has almost entirely drowned out the fact that CGT simplification is good news for large numbers of small investors, cutting tax charges on profits from investment properties and shares from as much as 40% to 18%. And on a more general level, it wipes out a whole pile of tax bureaucracy at a stroke. Anyone who’s ever tried to wade through the CGT pages on the Inland Revenue website will know what I mean.
And as for all the complaints that it will discourage enterprise, I have to say I find that accusation hard to stand up. The entrepreneurs I’ve met almost always seem to start businesses because they want to work for themselves. There are plenty of other reasons of course – as readers of Jody Clarke’s entrepreneurs column in MoneyWeek will have seen – but not a single one has ever told Jody:
“Why did I decide to give up my secure well-paid job, to throw myself into working seven days a week, 18 hours a day, on an idea that might have collapsed on its backside, all at a time when I’d just taken out a six-figure mortgage and my wife was pregnant with our third child? Well, have you seen the tax breaks available? I’d have been daft not to!”
As Scots entrepreneur and ‘Dragon’ (from the BBC show Dragons’ Den) Duncan Bannatyne points out, “for real entrepreneurs, business disposal is not the priority. It’s about the pleasure and pride you get from building a company and making it profitable. These are the important factors, not tax gain.”
Now don’t get me wrong. The Chancellor’s reasons for making the changes are all wrong – he’s going to raise an extra £900m a year from the tax, and he’s trying to pretend that it’s all about penalising private equity players, when in fact, they’ve got off the hook pretty lightly.
Moreover, unexpected, overnight changes in the tax system are not a good thing. Businesses and society as a whole like stability – it’s one of the reasons that, for all its flaws, democracy is the best system we’ve found so far for running a country (dictatorships may function for short periods of time, but a simple glance through British history will show you that for every ‘good’ absolute ruler like Henry II, you get a disastrous one like bad King John, and things always go pear-shaped around the time of the handover). And unquestionably, a lot of entrepreneurs who had initially set up on their own for precisely the reasons Bannatyne describes, may well have been basing their retirement plans partly on profits from selling their business, which have now potentially been sharply reduced.
But when it comes down to it, tax simplification is a good thing. Tax benefits should not drive investment decisions. Yet because of the complexity of the current system, which is in large part down to Gordon Brown’s insatiable appetite for fiddling with things he should leave well alone, that’s exactly what’s been happening.
However, just as the earlier U-turn on Sipps should have reminded us all (remember – that was when Mr Brown was going to let us all put buy-to-let property and wine cellars in our pension pots?), an investment decision that only makes sense because of the available tax breaks is not a good idea. Because the government can change its mind faster than you can say “floating voters”.
So all in all, I reckon a flat CGT rate is a good thing. Now it’s time to take a look at doing the same for income tax…
We’ve got more on how the CGT changes affect you in the next issue of MoneyWeek, out tomorrow. There’s also a great cover story from our editor, Merryn Somerset Webb, on a very profitable-looking sector that I suspect will be new to most of our readers.
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Turning to the wider markets…
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London’ FTSE 100 index ended the day 63 points higher, at 6,677, having shrugged off the weak start on Wall Street. Brewer Scottish & Newcastle led the blue-chips higher with an 18% share price surge on talk of an imminent bid. For a full market report, see: London market close
On the Continent, the Paris CAC-40 was up 44 points, at 5,818. And the Frankfurt DAX-30 was up 22 points, at 7,985.
Across the Atlantic, stocks closed mixed as gains for tech stocks were offset by the effects of the sky-high oil price. The Dow Jones was off 20 points, at 13,892. The S&P 500 was up 2 points, at 1,541. And the tech-rich Nasdaq was 28 points higher, at 2,792, as good results for Intel and United Technology Corp boosted the sector.
Tech shares also helped the Japanese Nikkei close above the 17,000 mark again, adding 150 points to close at 17,106. And the Hong Kong Hang Seng was 166 points higher, at 29,465.
Crude oil was trading at $87.71 this morning, off yesterday’s intraday record of $89, and Brent spot was at $84.11 in London.
Having dropped back to $754.10 in New York yesterday, spot gold was up to $760.00 this morning. And silver had risen to $13.70.
In the currency markets, the pound was at 2.0470 against the dollar and 1.4354 against the euro. And the dollar was at 0.7010 against the euro and 116.10 against the Japanese yen.
And in London this morning, mining stocks were on the up following a statement from BHP Billiton CEO Marius Kloppers that copper demand from China remained strong. BHP had gained as much as 1.1% and peers Rio Tinto and Anglo American were also higher.
And our recommended articles for today…
The one thing that could fell the tech giants
– Whilst hefty capital inflows are helping India-based technology companies grow at fantastic rate, the strengthening of the rupee could prove to be the fly in the ointment. For more on the threat posed by currency appreciation, click here: The one thing that could fell the tech giants
Could this be the ruin of the buy-to-letters?
– One thing all B2L investors must remember is this: property can turn nasty fast. And when it does, there’s one little covenant in their mortgage agreement that could prompt panic selling… For more from Merryn Somerset Webb on why the outlook is bleak for landlords, read: Could this be the ruin of the buy-to-letters?