To add another tax reform to my series on how to reform the tax system to reduce inequality in the UK, this one is yet another obvious candidate.
Abolish capital gains tax Entrepreneur's Relief
Capital gains tax Entrepreneurs Relief does, in essence, reduce the rate of gains tax by those who sell privately owned businesses. In most situations they pay 10% on their gains rather than 20%. The tax rate is halved.
In the last year for which data is available the relief cost as much as the tax paid on these disposals, or £2.36 billion. Of this £1.73 billion went to just 4,000 people, at a tax savings of more than £430,000 each, on average.
That is wholly unjust. It is a simple boost to those already wealthy. Remember, these people had by definition just picked up gains of in excess of £4 million each. And as I have argued before, the relief makes no sense. It does not encourage entrepreneurial activity at all. It encourages short-termism and selling out rather than developing entrepreneurial activity, both of which are the opposite of what the UK needs.
Nothing about this relief makes any sense at all. It has to go.
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If you can show that Entrepreneur Relief certainly does not encourage entrepreneurial benefit and growth, but instead facilitates selling and short-termism, then this is a no-brainer. Can it really be as simple as that?
Really enjoying this series; thank you for this.
How about taxing private school tuition fees at 20% (VAT basically; it is a luxury!) and ring fencing it for education spending on students at the other end of the socio-economic spectrum? You could do the same thing with private healthcare and the NHS.
I think the symmetry would be appealing!
Give me time….I have 30 ideas earmarked as yet and am adding to the list
Well, the research seems to suggest that entrepreneurs’ relief is (a) much more expensive (in terms of lost tax revenue) than originally expected, and (b) does not make much difference to investment decisions.
Given the rate of capital gains tax is already significantly below the rate of income tax – only 10% (for basic rate taxpayers) or 20% (for higher and additional rate taxpayers), and 18% and 28% for gains on residential property and carried interest – you have to ask why we need an even lower rate for certain “entrepreneurs”. Ditto the similar and newer but rather rarely used relief for “investors”.
Added to that, the test for an “entrepreneur” is quite lax – an officer or employee with a 5% interest in a trading company for two years or more (until April 2019, just one year or more) – and while it only applies to a lifetime allowance of £10m of gains, that is a tax saving of up to a million pounds per person.
The genesis of this seems to be taper relief, and the two year ER holding period gets us back to full business assets taper relief. Is there a good reason to reduce the tax rate on so-called long term capital gains (is two years “long term”?) and more so for certain favoured “business” assets? Or should we just be done with it, and charge tax on capital gains at the full income tax rates, like we used to do from 1988 to 1998, or a flat 30% rate like we did before then?
The last, Andrew…
We like people being entrepreneurs. They end up — as Bill Nordhaus pointed out — keeping about 3% of the total value created by their endeavours. The other 97% largely flows to consumers in the form of the consumer surplus. We like people working hard to make us richer. Therefore shouldn’t we let them keep more of the already trivial portion of the value created they get to keep in order to create that greater incentive to crack on with it?
What a load of nonsense, with the greatest of respect
National income and wealth data utterly refutes that
Your either ignorant or a liar
Yes please!
Keep ’em coming.
I suppose what this comes back to clear decisions about what the tax system is trying to do, and post-implementation review, which HMRC does too little of.
What was ER intended to achieve, and what has it achieved? It sounds so wonderful: a tax relief for entrepreneurs with small businesses, the engine room of the economy; who could argue with that. But is It is just a tax break for certain lucky taxpayers, allowing them to keep tens of thousands of their gains that they would otherwise have paid in tax, and so a deadweight cost; or does it actually incentivise some useful behaviours we want to encourage, because they get to keep 90% of their gains not just 80%? Is the benefit worth the cost? I think the research suggests the answer is clearly “no”.
The relative generosity of ER, which applies more or less across the board, can be contrasted with the forest of strict conditions around reliefs such as EIS, where there really has to be new money properly invested in a risky business, and for which there is better evidence that it encourages additional investment.
[…] less as a proportion of income than those with the lowest incomes of all. This is why I have been writing a series on necessary tax reforms to tackle income and wealth inequality in the UK. In this context my next […]