Capital gains change could yield €500m

A change in the rules for payment of Capital Gains Tax (CGT) could yield more than €500 million to the Exchequer next year and considerably help the budgetary arithmetic.

The move would be a politically easy way for the Minister for Finance, Mr McCreevy, to pay for extra spending on Budget day. His officials will have examined the possibility as they altered the payment arrangements for a range of taxes in recent years.

Capital gains is the tax levied at 20 per cent on profits from the sale of assets, such as investment properties and shares. Under current rules, taxpayers pay CGT liability by the October of the year following the asset sale. For example, a taxpayer realising a taxable gain this year would have to pay by October 2003.

By shortening the period for payment, Mr McCreevy could guarantee a substantial once-off cash gain to the Exchequer next year. If he changed the rules so that payment would have to be made within three months of the asset sale, then in 2003 he would receive all the tax due from asset sales this year, plus the tax owed on asset sales in the first nine months of next year.

This would give a once-off boost to the Exchequer of more than €500 million. This is a significant sum in the budgetary arithmetic and would be enough, for example, to pay the first-year cost of the backdated payment promised to public servants under the first phase of the benchmarking process.

Politically, this kind of change in the CGT regime would allow the Minister for Finance to say that he was raising revenue from the better off. While their tax liability would not increase, the requirement to pay the tax bills earlier would be a cost to those liable to CGT bills; currently they benefit from having the use of the money for a prolonged period after the asset sale.

The Minister is also expected to close off or restrict a range of other allowances and loopholes that are generally used by wealthier taxpayers.

The Government is understood to have closely examined the range of reliefs available for investment in property and is expected to announce restrictions in this area.

However, in last year's budget the Minister announced that the major schemes in this area - including the Urban and Rural Renewal Scheme, which offers special tax breaks for investment in designated areas - would be extended until the end of 2004. He may be loathe to go back on this commitment, although he could announce that the reliefs are being restricted.

At present, relief under most of these allowances can be claimed at the higher rate of income tax and restricting them to the standard rate would lower the benefit. The Minister could also indicate that the schemes would not be extended beyond their current end dates and could end smaller schemes, such as that available for investment in holiday resorts.

Other schemes that have been examined in the run-up to the Budget include the Business Expansion Scheme, currently due to expire at the end of next year, the tax relief for investment in films, due to run until 2005, and the scheme that offers tax-free income to artists.

There is also speculation that Mr McCreevy may indicate an end to tax-free income on stallion fees and move them onto the 12.5 per cent corporation tax rate.

A general tightening of reliefs to business is also expected. Mr McCreevy has been under pressure to increase the tax take from business to compensate for the promised reduction in the corporation tax rate to 12.5 per cent.