Accountants query legality of CGT changes

Just a week after the Chancellor revised his proposed changes on Capital Gains Tax, a leading accountancy body has queried the legality of the procedure.

According to the Institute of Chartered Accountants of Scotland (ICAS), European law asserts that changes to tax legislation must provide taxpayers a reasonable period of time to assert their right to claim reliefs.

The ICAS argues that that right will be denied under the new rules on CGT, which are due to come into effect in April 2008, just over two months away. Previous legal decisions indicate that a transitional period of 90 days, more than the time period proposed in the recent change to Capital Gains Tax, is insufficient.

At the Pre Budget Report (PBR) in October 2007, the Chancellor announced his intention to simplify capital gains. He proposed to abolish indexation, remove taper relief for both business and non-business assets and introduce a flat rate of capital gains tax of 18 per cent. The move was condemned by small business organisations who argued against what would have been a tax rise of 80 per cent for someone closing their business.

Entrepreneurs' relief

On January 24, the Chancellor revised his decision and introduced what he called 'entrepreneurs' relief'. As a result, lifetime gains on qualifying business assets which exceed the annual CGT exemption and do not exceed £1 million will be taxed at 10 per cent. Any gains in excess will be taxed at the mainstream CGT rate of 18 per cent.

ICAS's Director of Taxation, Derek Allen said, "Taxpayers now have less than 10 weeks to rearrange their assets and, if necessary, try to arrange a disposal to protect some of the indexation relief which may have accrued because of inflation between 1982 and 1998. It is wrong to tax inflationary gains and it would be contrary to European Law to deny taxpayers sufficient transitional time to rearrange their affairs before the new legislation is enacted.

"It would be irresponsible to enact complex changes and not give a sufficient transitional period for taxpayers to consider the implications and arrange their affairs properly. At the very least, the Chancellor should defer the implementation of this legislation for up to two years. If this is not possible, he should still allow taxpayers who owned assets on October 6 2007 a period of up to two years to sell those assets and gain the benefit of indexation allowance."