The decision by the Minister for Finance to halve the rate of Capital Gains Tax to 20 per cent is a huge boost for investors and is expected to release hundreds of millions of pounds tied up in long-term investments.
The punitive 40 per cent rate of tax on investment gains is said to have prevented many investors from realising these gains over the years, with the result that small and emerging Irish companies were starved of much-needed equity.
The reduction, which comes into effect immediately, will also increase the attractiveness of profit-sharing schemes, offering employees some level of tax incentive to participate in these arrangements.
On the downside, however, there is some disappointment that the Minister has failed to ensure that some of the funds realised are reinvested in other Irish companies. There are fears that some monies will now leave the Dublin market to be invested elsewhere - potentially leaving small companies again unable to raise equity.
The 20 per cent rate will substantially reduce the tax liabilities of many investors with money tied up in the stock market. For instance, an investor whose shareholdings may have accrued gains of around £1 million would, under the current rate, have to pay £400,000 in capital gains tax if they were to sell their shares. Under the lower rate, that liability reduces substantially to £200,000 and will clearly encourage the release of profits.
The Minister has also introduced an individual allowance of £500 for CGT, abolishing the current allowance of £1,000 for a single person and £2,000 for a married couple, bringing more people into the CGT net but at the lower rate. This takes effect from April 6th.
In its pre-budget submission to the Minister for Finance, the Irish Stock Exchange had urged the Government to ease this tax burden to encourage investment in young companies. It claimed investors were currently sitting on hundreds of thousands of pounds of stockholdings, because of the huge tax losses they would incur if they were to sell them or switch into other investments.
The Irish Stock Exchange general manager, Mr Tom Healy, said it warmly welcomed the bigger-than-expected cut in CGT and was optimistic that it would allow many people to get out of long-term holdings and reinvest their money in emerging Irish companies.
By bringing the CGT rate down to 20 per cent, the Minister has brought it closer to the tax rate levied on other investments such as special savings accounts and special portfolio investment accounts, where rates of 15 per cent and 10 per cent will apply respectively after the Budget. The reduction is also expected to sharply boost CGT tax returns to the Exchequer. Currently, CGT net receipts account for just a half of one per cent of the total Exchequer tax take.
While the announcement came too late to have any impact on the ISEQ index of share values, brokers expect it will be positively received today and will reaffirm investor confidence in the Dublin market.
After April 6th, CGT in Ireland will be sharply lower than that paid by investors in the UK. And by introducing a flat 20 per cent rate, it also simplifies the options for investors.
At the moment, some investors can avail of a lower rate of CGT, by investing in certain private Irish companies. Gains on funds invested in these companies, which must trade in specifically designated sectors, are taxed at a special rate of 26 per cent, but relatively few investors are able to avail of this rate.