It was depressing to hear Labour Shadow Minister Stephen Reed tell Andrew Neil yesterday that Labour has no plans to tackle the different tax differential that means that capital gains in the UK are taxed at near enough half the rate charged on income from work in the UK.
This is despite the compelling evidence from Rishi Sunbak's tax returns and recent academic studies that shows that this loophole is widely used to massively reduce the overall rate of tax paid in very large incomes to rates lower than those paid by many on little more than average UK pay when national insurance paid on income from work is also taken into account.
Labour's justification for taking no action is, incidentally, that they do not want to tax people's homes. But that is absurd. That tax base exemption has nothing to do with the tax rate. They can't even get basic facts right.
I have long suggested that this differential is wrong. What follows was first posted on this bog in December 2021, but nothing has changed, except that Labour has moved ever further to the right and ever further from its supposed left-of-centre roots.
In a series of videos I am looking at practical ways in which we can tackle the problems created by inequality in the UK, particularly represented by the rise in the number of multi-millionaires in our society, not least during the course of the Covid epidemic.
One of the ways in which the UK tax system is heavily biased towards those with wealth is in the way in which it taxes capital gains. These are the profits that people make on the sale of assets that they have owned, sometimes for only a few days, and other times for many years, whether they be shares, rental properties, artwork, bitcoins or something else of a similar type.
The UK tax system charges these to tax at rates that are about half those applied to income from work, and to add insult to injury, no national insurance is charged either. I explore what to do about this issue in this video.
This video is one of a series. Follow the link to see the rest.
Should capital gains be charged to tax at the same rate of tax as used on income from work?
- Yes (85%, 419 Votes)
- No, but the difference should be cut considerably (6%, 29 Votes)
- No, because that would be unfair to those who have earned their capital gains over a long period of time (5%, 26 Votes)
- No (3%, 17 Votes)
- No, because that would penalise entrepreneurs (0%, 1 Votes)
Total Voters: 492
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And it is not just about Capital gains tax – all income from investment should be charged at the same rate as that from work.
The solution is simple – abolish National Insurance and raise income tax…. along with Capital Gains (bar a modest allowance to keep most people out of the net) to be charged at your marginal income tax rate.
This would not be administratively difficult as all the pieces are already in place.
Such a change would hit wealthy, old folk…. and it would be unfair to spring this on people who have little opportunity to change their income. So, Cut NI by 1% a year over the next 12 years; raise Income Tax by 1% a year over 12 years; equalise CGT rates to these new Income Tax rates.
If you made it fiscally neutral you could probably cut tax on work from its current levels….. which might be a vote winner!
I dislike the language of a tax loopholes, as it suggests exploitation of an unintentional gap. The current differential rates of income tax and capital gains tax is a deliberate and horrible feature not a random or unexpected bug. And it is deeply unfair that some lucky people can structure their remuneration in forms that are taxed at much lower rates that others.
The work of Arun Advani and Andy Summers based on HMRC data on the effective tax rates at the upper end – annual remuneration of millions of pounds – is eye opening. In short, there is a cohort of around a tenth that pay at or close to the headline 45% rate, but the median is much lower at around 28%, and around a quarter of them pay close to 10% rate. And it is not just one off realisations. Some people do that year after year.
Precisely
And Labour wants to perpetuate this
Which is why I think loophole is the right choice
I agree with Andrew. Folks don’t pay NI on the first £120 a week (I think) of earnings. That’s not a loophole, that’s a deliberate decision, and obvious to all. A loophole is the sort of technicality that is explained starting with the words “It turns out that if you…” The status of capital gains is clearly like NI, not some trick (whether deliberate or accidental) that PwC will help you with for a fee.
I disagree
The NI exemption is socially motivated
It undermines no other tax
The CGT loophole is politically motivated and undermines another tax by creating spillover effects that are abused
That is a loophole
It may be legal, and all avoidance is, but it’s still a loophole
Seems to me that income from capital should be taxed higher than work, just putting it out there
My memory may be faulty but in the 1960s and 1970s didn’t we used to talk about earned and unearned income? Unearned income being what I now understand, rightly or wrongly, as Capital Gains.
At the time it was considered normal that as an important matter of fairness any income that was not earned should obviously attract a much higher rate of tax.
An idea that went back at least as far as the early years of the 20th Century when Liberals like Churchill, as he was then, used to make speeches about the gross iniquity of Landowners making huge profits that they had done nothing to earn from the sale of land for housing.
The current usage of “Capital Gains” is so morally neutral that for most people the unfairness of the tax dodging it breeds becomes just another brick in the wall of the normalisation of corruption.
Unearned income could have included gains
But it was mainly from rents and investments
They gain by having no national insurance on them
How much would be raised by equalising the taxes?
Always hard to know precisely
£15bn, maybe
… which could be “a £15bn tax cut for working people”
Not a bad pitch at the next election!
I voted yes but acknowledge there is an issue where the capital gains were made over a number of years. One approach to making this fairer would be to calculate what the annual gain, rather than the total gain, was and then use that, along with other income in the year where the capital gain was realised, to determine what the marginal rate that should be applied to the whole gain. The whole capital gain would then be taxed at that marginal rate. This would make no difference for the very rich – they should be paying a 45% marginal rate on their income anyway.
I have always found it interesting that the sale of the primary residence in the USA is subject to capital gains tax on gains over $250,000 if one is single and $500,000 if one is married.
Yes
Income is Income, whatever source it is from.
Absolutely, should be at income tax rates but on the genuine gain ie indexing cost as happened many years ago.
Why is that the genuine gain?
RPI or CPI Indices are terrible approximations to gains
RPI & CPI are not good, but what would be better.
Fix RPI? But how?
Wow
Big question
And sorry – no time to address it
How am I supposed to vote? I think unearned income should be taxed at a higher rate than earned income .
I will give you another chance
The example Rachael Reeves gave during the Today interview for not taxing Capital gains at the same rate was not to punish entrepreneurs who wanted, at retirement to sell their business. This seemed a particularly obscure example to use to justify Labour’s current policy.
Agreed