During the peak of the first coronavirus lockdown I wrote a great deal about tax reforms required after coronavirus. Much of that series focussed on reforms to wealth taxation, of which capital gains tax (CGT) is considered a part.
I wanted a number of things with regard to CGT. First, an alignment in rates between income tax and capital gains tax. Thus would reduce distortions in the tax system that are unjust and unjustifiable.
Second, a substantial reduction in the annual allowance for capital gains tax, which was again unjustifiable.
Third, allowances needed restriction - which I have been arguing for many years. Many are straightforward gifts to the already wealthy.
Fourth, the issue of capital gains being wiped out in deaths - which I addressed in The Joy of Tax - needed to be addressed, ideally with regard to domestic property as well as other assets.
Fifth, automatic information of gains data to HMRC has long been a demand of mine, to limit evasion.
The net effect would be to tax capital gains as if an extension of income tax.
I am pleased to note that the Office for Tax Simplification has adopted most of these ideas in its new report on capital gains tax. Specifically, they have endorsed items 1, 2, 3 and 5 and have made some suggestions on 4. This was much more than I expected and justified the work several tax justice campaign groups put into this issue. I submitted comment to the review.
There will always be the naysayers though. The FT, in an editorial, says this morning that these changes will not substantially increase revenue as a consequence of changes in behaviour. They, therefore, question why they are worth doing. I would quietly suggest to the FT that they really should learn that a primary purpose of tax is to change behaviour, and another is to reduce inequality. When they understand that they will appreciate why these changes are important. Revenue is a long way from being everything in tax.
There will also be other, more reasonable doubters. They will wonder whether these changes will actually happen, and certainly whether they will happen as a package, which is clearly what they are intended to be. I share that doubt. But as ever, I can live in hope.
Overall, this is good work by Bill Dodwell and the Office for Tax Simplification and it is fair to say so. But I would add, much more needs to be done before wealth is taxed fairly. Keep going, is the message.
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For some reason, those who realise significant capital gains, and those who think they might, don’t like to pay tax on the gains. The worst excesses of base cost shift and cherry picking have been dealt with, but private equity executives still do well out of their carried interest taxed as capital. A small but significant number of people frequently realise gains on their portfolios of shares or property, almost as if their “investment” as just a regular speculative business activity.
Peculiarly, it was a Conservative Chancellor who first aligned the rate of capital gains tax with the rates of income tax in 1988, and a Labour one who broke that alignment by introducing taper relief in 1998. The original slow 10 year taper to 10% for business assets or 24% for non-business assets was not so bad, if you want to encourage and reward the long term patient holding of investments over short term speculation. The real damage was cutting the holding period to achieve the lowest rates to four years in 2000 and then two year in 2002. And then entrepreneurs’ relief and the 18% rate, and now here we are, with gains potentially taxed at zero, 10, 18, 20, or 28%, but not 40 or 45%.
UK companies paid the same rate on income and gains throughout, even if it is only 19% currently.
I found it bizarre that thew Low Income Tax Reform Group asked for the CGT allowance to be retained today to support those on low incomes who do not know that they have capital gains
The LITRG is a Chartered Institute of Tax front and this was underhand lobbying
November 12 2020 at 5:12 pm
“I found it bizarre that thew Low Income Tax Reform Group asked for the CGT allowance to be retained today to support those on low incomes who do not know that they have capital gains”
What’s bizarre about that?? Many people have share ownership participation or invest their savings.. it certainly doesn’t make them overly wealthy.. why not encourage saving?
Do you have any clue about the reality of saving?
If you had you would realise that this is a ridiculous comment
Well CGT allowance certainly encourages me to invest in the share ownership scheme offered to me by the company I work for, as it does for the vast majority of my work colleagues..and participation in it is “savings“ as far as all of us are concerned!!!
I would eliminate such schemes, I readily admit
It is pretty unfair to condemn the LITRG as a CIOT “front”. It quietly does a lot of very good work to help otherwise unrepresented taxpayers comply with their tax obligations, and to encourage HMRC to fix parts of the tax and benefits system that make compliance difficult or catch people out.
Their press release – https://www.litrg.org.uk/latest-news/news/201112-press-release-disappointment-major-capital-gains-tax-report-neglects – says reducing the annual exemption by £2,000 would bring more than 250,000 taxpayers into self assessment. These are mostly people with modest PAYE income who don’t normally file tax returns, but for one reason or another realise a gain of £10,000 to £12,000 in one year, probably on the sale of a relatively modest property. At the outside, that is raising another £560 of tax from each of them at current rates (or £900 at 45%). Every little helps, but there are much bigger problems to address than the annual exempt amount. If we leave it as it is, fiscal drag will erode it away.
I disagree
The second allowance is an injustice providing the best off with twice the annual allowance to those on lower incomes
The OTS agreed with me
“I would eliminate such schemes, I readily admit”
Based on what? Your prejudice? They support a sense of loyalty to the company and a feeling everyone’s interests are aligned. Also at my place the scheme is offered to every employee after they have been with the company 6m.
Let’s start with why some employees should get an advantage others do not
And then let’s suggest that the politics here are all about selling capitalism
After which tell me this: how much bigger is the bosses’ pot proportionately than yours? And then tell me if you see any justice in that
“Let’s start with why some employees should get an advantage others do not”
Well at my company all employees can participate. Maybe that’s not available at other companies, so pressure should be applied so they do!! Why drag everyone else down?… it’s a bit like saying Company A offers each employee an extra days holiday for every 3years worked (mine does) .. but Company B doesn’t so it is unfair… so deny that to everyone.. with that attitude we would still be in the workhouse for Christ’s sake!!
I am talking employees generally – why should you get an adb=vnatge others do not get – most especially in smaller companies?
“Let’s start with why some employees should get an advantage others do not”
That one is easy and I’m surprised you don’t understand.
Smaller companies often don’t have the cash to pay key employees highly enough to recruit and retain them. So share schemes allow those companies to offer an alternative form of reward. The smaller companies are able to say “we can’t pay you as highly as bigger companies but can offer you the chance (not the guarantee) of a future reward to compensate”.
This can act as an incentive for those staff to work for a smaller company and help it grow.
I can’t see why you would object to this.
Why do you want smaller companies to be disadvantaged when trying to attract key staff to help them grow?
I was in practice for many years
You misrepresent reality here
In small companies these schemes rarely work
They are expensive
And usually create long term resentment when value cannot be realised
You still also miss the point that this just randomly and unnecessarily complicates tax
“I would eliminate such schemes, I readily admit”
It is not clear what you seek to eliminate: employee share ownership schemes generally, or the tax advantages attached to some of them?
I want to simplify the tax system and remove inequalities within it
“I was in practice for many years”
That was a long time ago. Things change.
“In small companies these schemes rarely work”
I have advised many companies where they have been successful – far more recently than when last you worked in practice.
“They are expensive”
I can get an EMI in place for around £2,500.
“You still also miss the point that this just randomly and unnecessarily complicates tax”
I’m sure you do find it complicated. It really isn’t when you take to time to learn how to do them properly.
“You misrepresent reality here”
It is you that does not have a grasp of reality. Many thousands of small companies have such schemes.
So it must be asked again. Why do you want to deny small companies the chance to recruit the best employees?
So, you are not in a small company
You are peddling EMIs
And I do know how to do them – they were around when I was practising – and clients, when the bullshit was stripped away from them – found them deeply unattractive
I set up one – and the client then hated it, as did their staff
Please don’t call again
I need to correct an error I made: the LITRG were talking about reducing the AEA *to* £2,000: that is, by £8,300. That would bring an additional 250,000 people into self assessment, and raise at most £2,884 (at 28%) or £4,635 (at 45%) per person. Current annual CGT yield is about £9 billion, so this measure could be about a tenth more each year, although no doubt behavioral change will stop an extra billion being paid.
The graphs on pages 11 and 12 of the OTS report are interesting – a significant bunching of taxpayers just below the AEA limit, and the numbers of taxpayers brought into self assessment with various lower levels of AEA. It should be a de minimis to avoid administrative burdens not a structural relief, and I can see the rationale to reduce it, or let it wither. I can also see a rationale to taper it away, like the income tax personal allowance, if a taxpayer’s income and/or gains are sufficiently high.
Carry isn’t taxed as capital, it has its own regime and tax rate which higher than the cgt rate.
And equivalent to income tax?
“clients, when the bullshit was stripped away from them — found them deeply unattractive”
And yet the latest statistics show over 12,000 companies have an EMI in place. I wonder who is right about whether they are attractive. You and a handful of your clients from decades ago or the 12,000+ companies that have them in place today.
12,000 out of 4.5 million companies?
“12,000 out of 4.5 million companies?”
Wow what a statement, disingenuous to say the least!!! How many of those companies have a material trading record? How many have been set up and are effectively dormant? How many of those companies have a structure which allows a share ownership programme to be in place? ( ie the ability to trade shares on the secondary market)?., not many! I presume you know that hence the term disingenuous. You are very manipulative in your use of language to support your prejudice it would seem.
12,000 is the square root of diddly squat in the case, however you calculate it
I suggest you stop the trolling
If there are only 12,000 of them why bother changing it. It’s clearly not going to move the needle.
You really don’t understand what equal treatment means, do you?
[…] of private equity and hedge funds. It comes in response to the review of capital gains tax, whose findings were announced last week. In the editorial the FT […]