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British Prepare for Impending Capital Gains Increase

Posted by Brian Garst on June 22, 2010

UK Chancellor George Osborne is expected to include a sharp increase in Britain’s capital gains tax when he unveils the emergency budget on Tuesday.  Preparing for this, British citizens are acting to take advantage of the lower rates while they still can:

A string of share deals worth nearly £400m were disclosed yesterday as company executives scrambled to sidestep a feared rise in capital gains tax in today’s Budget.

…Observers believe Chancellor George Osborne could increase the rate to 40pc. Executives sitting on large paper gains in their investments want to pocket their winnings now rather than wait and pay a higher tax bill later.

The share sales – many of which are structured to allow company bosses to retain control over their holdings – mean they are likely to avoid tens of millions of pounds in tax.

…Over the past few weeks, details have emerged of deals by a string of executives at other companies. Some – including Tim Howkins of spread betting firm IG Index and Sir Nigel Rudd of motor dealer Pendragon – have shuffled their holdings into trusts or investment companies over which their retain control.

When faced with changing tax rates, taxpayers will respond by changing their behavior.  In this particular case, it means increasing present earnings at the expense of future earnings.

As Dan Mitchell noted, Art Laffer wrote recently of his concern that US corporations are taking similar action in preparation for the currently scheduled capital gains increase from 15 to 20 percent when the Bush tax cuts expire at the end of the year, and that it will lead to an economic collapse in 2011.

We should continue to watch the British experience closely, especially if the tax increase does as much damage to their economy as some are predicting.

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