HMRC have published a report of a survey of capital gains taxpayers and their agents exploring perceptions of the impact of the changes to the regime since 1998 on investment behaviour.Budget 1998 introduced fundamental reforms to CGT, for individuals, trustees and personal representatives. The reforms included the freezing of indexation allowance, and replacing it with taper relief; drawing a distinction between business and non-business assets, with business assets benefiting from more generous taper relief; phasing out retirement relief and reinvestment relief; and more generous deferral relief in the form of the Enterprise Investment Scheme (EIS). The reforms aimed to promote enterprise, to reward risk-taking and to encourage long-term investment.
HMRC commissioned a quantitative survey evaluating the impact of the changes to CGT since 1998. The main survey, undertaken by Ipsos MORI, interviewed 948 CGT payers and 200 agents between November 2005 and January 2006. The findings were then weighted to represent the CGT payers’ and agents’ population within the UK.
At the time of the survey, CGT payers held a wide range of assets, although quoted shares and residential let property (38%) were the most common. CGT payers were more likely to hold non-business assets than business assets.
The survey found that over the last decade the levels of investment in business and non-business assets have been broadly stable, with the balance in favour of non-business assets. Any changes over time tended to be explained by personal circumstances, such as an individual CGT payer having more money to invest, or moving into retirement, rather than as a result of changes to CGT rules.
Neither CGT nor tax generally was spontaneously mentioned as influencing investment decisions, with financial (such as rate of return, selling at a market peak) and personal considerations (such as wanting to work for yourself) more important.
Some of the findings of the survey were as follows:
• 75% CGT payers used an agent. The main reasons given for this were that the payer found their tax affairs too complicated or lacked detailed knowledge of the subject. Many thought that the tax system more generally was complicated, but CGT was considered the most complex out of all of the individual taxes.
• Knowledge of CGT was generally high, (among both CGT payers and agents), with 95% of payers saying they knew something about it.
• Knowledge of the detailed aspects of CGT, however, was a little lower among CGT payers. The annual exempt amount had the highest profile (59% said they had heard a great deal or a fair amount) while the distinction between business and non-business assets had the lowest (27% said they had heard a great deal or a fair amount).
• 34% said that CGT affected their decisions to acquire assets, and 48% said it affected their decisions to sell assets. The main influence CGT rules had on CGT payers was for them to ensure that their gains stayed within the annual exempt amount.
• Almost half of CGT payers (44% for business assets and 43% for non-business assets) said that their past disposals of assets would not have happened if CGT had been higher, while around a third (34% for business assets and 37% for non-business assets) said their past disposals would not have happened if the holding period required to maximise taper relief had been longer.
• Knowledge of EIS and VCTs was fairly low among CGT payers, while use of EIS was the higher of the two (10% had heard a great deal or a fair amount about EIS compared with 9% who had heard of VCTs). For those making use of EIS and VCTs, CGT incentives, especially deferral, were at the forefront of the reasons cited.
• Most asset holders did not have a timescale in mind for disposing of their main asset. Of those that were planning a disposal, around a third said that the decision to hold on to it had been affected by CGT considerations – mainly that they thought CGT was too high (39%).
Editor, TaxationWeb News
Evaluation of CGT changes since 1998 for HMRC