The History of CGT

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The history of Capital Gains Tax (CGT) in the UK is relatively young, especially when compared to other forms of taxation such as Income Tax. Introduced in the 1960s, CGT has undergone various reforms and changes in rates since then.

1. Introduction

Capital Gains Tax was first introduced in the UK on 6 April 1965 by then Chancellor of the Exchequer, James Callaghan, as a part of his Budget. The move was designed to prevent taxpayers from avoiding paying Income Tax by switching their income into capital.

2. Development

During its early years, Capital Gains Tax was charged at a flat rate of 60%. However, in 1982, the Conservative government under Margaret Thatcher introduced a new system where CGT was aligned with an individual’s marginal rate of income tax.

3. Taper Relief

In 1998, Chancellor Gordon Brown replaced the indexation allowance (a measure which allowed gains to be reduced to account for inflation) with a system known as taper relief. Under this system, the rate of tax paid on an asset would decrease the longer it was held. This meant that long-term investments were taxed at a significantly lower rate than short-term ones.

4. Abolition of Taper Relief

The taper relief system was abolished in 2008 by Alistair Darling, who replaced it with a single flat rate of 18%. This move was controversial, as it was seen as a disincentive to long-term investment.

5. Introduction of a Sliding Scale

In 2010, the government introduced a new system with a sliding scale based on an individual’s income. Basic rate taxpayers would pay 18% on capital gains, while higher and additional rate taxpayers would pay 28%.

6. Recent Changes

In 2016, the rates were reduced further to 10% for basic rate taxpayers and 20% for higher and additional rate taxpayers. However, these reductions did not apply to residential property, which remained taxed at the previous rates of 18% and 28%.

In 2020 Reporting of Capital Gains on Residential Property changed from an annual submission via Self-Assessment to 30 days reporting. (Changed to 60 days in October 2021). This allowed HMRC to collect tax more quickly.

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