The halving in the rate of capital gains tax is good news for investors and will considerably ease the tax burden on shareholders in businesses when they sell their holdings.
The reduction in the rate to 20 per cent will sharply reduce the tax bill faced by many investors on the disposal of assets. However, from next April the amount of gains which an individual can accrue before becoming liable to the tax will fall to £500 from £1,000 now, meaning that more smaller transactions will be brought into the tax net.
For the thousands of people who purchased reduced price shares in addition to their allocation of free shares during the flotation of companies such as Irish Life, Irish Permanent and, more recently Norwich Union, the news will be mixed. The immediate cut in capital gains tax (CGT) means they will face a lower tax rate when cashing in their holdings.
But those who wait until the next tax year before selling their shares will find that they are taxed on any gains in excess of £500, which means that many smaller-scale investors will be brought into the tax net.
Brokers expect large-scale shifts in investor shareholdings, with many likely to come to the market in the coming months to realise their profits.
Another impetus for halving the rate of CGT from 40 per cent to 20 per cent in the Budget is to encourage more companies to introduce employee shareholding schemes. Employees will now have a greater incentive to participate and the change in the tax regime will be a major benefit to thousands of employees in major industries - particularly multinational firms - who are already sitting on substantial capital gains from shares in their employers.
The new 20 per cent rate of tax on investment gains has been warmly welcomed by the investment community, with brokers expecting a flood of money to be released and potentially reinvested in other Irish and international stocks.
While brokers were generally kept busy yesterday advising clients on the implications of the Budget for their investments, most investors are expected to sit tight for the time being but are likely to increasingly move to realise their gains before the end of the tax year.
The new 20 per cent rate applies immediately but there may be some further benefit for investors who cash in their shares before the end of the tax year. They will be able to avail of the current allowance of £1,000 for a single person and £2,000 for a married couple. This is due to drop to an individual allowance of £500 from April 6th next.
Mr John Kielthy, head of private clients at NCB Stockbrokers, said the new lower rate of CGT is extremely positive for the Irish stock market, increasing its liquidity and attracting more investors into Irish companies.
"The 20 per cent rate of CGT is more conducive to risk-taking, allowing greater returns for investors putting money into the stock market. It is a very positive development that will lead to more activity in the Dublin market, broaden the investor base of most companies and encourage entrepreneurs," he said. The Irish Stock Exchange has estimated that hundreds of millions of pounds are currently tied up in long-term investments because of the punitive 40 per cent rate of tax on investment gains. It had lobbied the Minister for a reduction in this rate, arguing that such a move would release badly-needed equity for young and emerging Irish companies.
Brokers yesterday agreed that there would undoubtedly be some movement of funds out of the leading stocks, such as Bank of Ireland, AIB and CRH into other Irish and international stocks.
