Clause 34, as we have heard, makes changes to the procedure of indexing the capital gains tax annual exempt amount from the retail prices index to the consumer prices index from 6 April 2013. It also sets the annual exempt amount for 2012-13 at £10,600, keeping it at the same level as for 2011-12.
The annual exempt amount, which sets the amount of capital gains an individual can make each year tax-free, is automatically indexed every year, unless Parliament sets a different figure. At Budget 2011, we announced that the CPI would be used as the default indexation assumption for the capital gains tax annual exempt amount in order more accurately to reflect the rate of inflation. That change reflects the Government’s intention to move the underlying indexation assumption for direct taxes from RPI to CPI in order to have a consistent measure of inflation across all policy areas.
In autumn, we announced that the annual exempt amount would be set at £10,600 for 2012-13, the same level as for 2011-12. I understand that this change will affect some people near the threshold, but the reality is that tough decisions need to be taken on both tax and spending to tackle the budget deficit and ensure that everyone is paying their fair share of tax. The annual exempt amount, along with private residence relief, which exempts main homes from CGT, will continue to keep the vast majority of people from paying CGT altogether.
I should also point out that the one-year freeze in the AEA enables us to afford the one-year CGT holiday for capital gains invested through the new seed enterprise investment scheme. SEIS opened for business in April and will encourage investment in new start-ups, which are a vital source of future growth. The scheme offers income tax relief of 50% to investors on amounts invested up to £100,000, and includes a capital gains tax holiday for 12 months. Each eligible company will be able to receive an investment of up to £150,000. The scheme has been available since April 2012.
In amendment 42, the Opposition ask for yet another report to be laid in the House of Commons Library, this time on the impact of setting the AEA at £10,600 in 2012-13. Information about the measure’s impact on the number of taxpayers brought into CGT has been published on the HMRC website in a tax information and impact note, to which the hon. Member for Newcastle upon Tyne North referred. HMRC will also be monitoring the impact of the measure, using information collected from annual tax returns.
Only a relatively small number of individuals who have capital gains tax liability slightly above the AEA threshold will be directly affected. The Government believe that freezing the AEA is the right thing to do at a time of fiscal constraint. As I have said, keeping the AEA at this level means that the majority of people do not have any CGT to pay, while ensuring that substantial gains are taxed.
The hon. Lady raised the issue of administrative burdens that may exist as a consequence. The AEA being lower than it would have been without a freeze could lead to around 60,000 more individual tax returns with a CGT liability being submitted between 2012-13 and 2015-16. However, the number of individuals affected is likely to be lower, as some individuals will have a CGT liability in more than one of those years, and some taxpayers will arrange their affairs so that the gains made in any one year will remain below the AEA. Administrative burdens on individuals are therefore likely to be small, and the impact will be further limited, given that a significant proportion of individuals affected are likely to be within the self-assessment system. The process of notifying capital gains using self-assessment is relatively straightforward, and HMRC has the necessary resources in place to provide guidance to those who need it.
My hon. Friend the Member for Redcar mentioned CPI and RPI. We believe that CPI is the most effective measure for the impact of inflation. As my hon. Friend is aware, we inherited proposals relating to uprating of particular taxes that were based on RPI. We are in very difficult fiscal circumstances, as we all know, and a choice to depart from uprating by RPI would have a significant cost, which would have to be found from elsewhere. None the less, the move towards using CPI uprating for direct taxes is sensible.
Another point, very much in the context of fiscal drag, is that perhaps the most significant threshold in the tax system is the size of the personal allowance, which we are increasing well above either CPI or RPI. The Government’s progress in the past two years on that front is one that hon. Members will welcome.