Amid calls for a radical overhaul of capital gains tax, a renowned think tank has advocated the abolition of duties on investment and property profits.
The Institute of Economic Affairs (IEA), a free-market organisation, is preparing to lobby for root and branch reform of CGT after Chancellor Rishi Sunak commissioned a review of the levy last week. The Office of Tax Simplification (OTS) said the review would examine all aspects of the tax to see whether it is working properly.
This will include rates, exemptions and the 100pc relief that families enjoy when they sell their home. The assessment comes as the Chancellor tries to balance the books in the wake of the costs arising from the Covid-19 pandemic. While public expenditure approaches £1trillion for the first time, borrowing is expected to amount to £322bn this year, a peacetime record.
The UK’s debt is now larger than its economy which has stoked fears that taxes will rise as the result of a drop in national income caused by the struggling economy. However, Treasury officials insist the CGT appraisal is merely part of a routine examination of the system and is not intended to result in policy change.
Professor Philip Booth of the IEA said the best outcome would be to scrap the ‘complicated and damaging’ tax and called for its abolition rather than a restructuring.
CGT a costly and ineffective tax
Nimesh Shah of accountancy firm Blick Rothenberg, said the rationale for scrapping both CGT and inheritance tax was based on evidence that they raised less than 1pc of the Treasury’s tax revenue but created considerable administrative costs for HMRC.
Another think tank, the Institute for Fiscal Studies, has put forward radical reforms, including increasing rates to match income tax at 20pc, 40pc or 45pc. Currently, basic-rate taxpayers are charged 10pc on profits from the sale of assets such as shares and 18pc on residential property gains, whereas higher-rate taxpayers pay 20pc and 28pc respectively.
Nonetheless, both think tanks believe any increase in rates should be accompanied either by the reintroduction of protection against inflation, the ‘indexation allowance’ which discounted inflation from taxable gains and was abolished by the Labour Chancellor Gordon Brown in 2008, or new allowances to encourage saving.
Otherwise, taxpayers would be paying duties on money that had not grown in real terms which could lead to tax avoidance measures being taken.
Speaking to the Treasury Select Committee last week, Mr Sunak admitted that ‘tough choices’ lay ahead, a euphemism for tax rises. Additionally, he has little room for manoeuvre because of the promises made in last year’s Conservative General Election manifesto not to increase rates of income tax, national insurance or VAT.
CGT could be pegged at rates for dividend income
Ironically, Labour’s General Election manifesto last year laid down a pointer to possible changes. The document presented plans to ‘end the unfairness that sees income from wealth taxed at lower rates than income from work’. The proposals included a huge reduction in the annual capital gains tax allowance, from £12,300 (this year) to £1,000.
Plans were also laid out to tax capital gains at the same rate as income. Accordingly, a basic-rate taxpayer would pay 20pc tax on the disposal of a share portfolio or second property, while higher-rate and additional rate taxpayers would pay 40 and 45pc respectively.
Although it is unlikely that Mr Sunak would go this far, a possible way forward would be for him to tax capital gains at the same rate as that applied to dividend income. Currently, any annual dividend income from share-holdings above £2,000 is taxed at 7.5pc, 32.5pc or 38.1pc, dependent on whether an investor is a basic, higher or additional rate taxpayer.
Most of these rates would sit between current capital gains tax rates and income tax rates. Yet not everyone agrees with the experts who believe higher tax rates on capital gains would raise much-needed tax revenue and represent a least-worst option impacting first and foremost on wealthy investors.