The Coalition Government is proposing to make radical
changes to Capital Gains Tax in the Budget on 22nd June 2010. These
changes could unfairly hit thousands of small investors and savers,
many of them retired and on modest incomes. If CGT is to be
reformed with rates increased from 18%, it needs to be done with
care and the following should be considered to ensure
this:-
• Retain the current capital gains tax allowance at
£10,000 so portfolios can be managed;
• Ensure that any inflation within existing capital gains
is exempted - by the re introduction of indexation or
rebasing all assets at an appropriate date.
• Introduce taper relief to deter short term speculation
and encourage longer term investment decisions.
It is worth noting the experience in the US of higher CGT rates
which suggests that the tax revenue could be lower given that it is
a voluntary tax and changes in investment behaviour occur to avoid
payments (see Adam Smith Institute paper ‘The Effect of
Capital gains Tax Rises on Revenues’1).
The current position
Individuals resident in the United Kingdom are subject to a
capital gains tax, charged at 18%. Exemptions include gains
on principal private residences, holdings in ISAs or gilts, and
investments in some start up enterprises. Every individual
has an annual capital gains tax allowance: for the 2009/10 tax year
this “annual exemption” is £10,100.
The proposals
The Queen’s Speech states that the Government “will
seek ways of taxing non-business capital gains at rates similar or
close to those applied to income, with generous exemptions for
entrepreneurial business activities”. This implies that the
capital gains tax for individuals could be raised to 40% or even
50% for highest rate tax payers, as proposed in the Liberal
Democrats’ manifesto. No mention has been made about the
annual exemption or reintroducing indexation for inflation. In the
past the Liberal Democrats have proposed reducing the annual
allowance to £2,000 per annum2.
Our concerns
This proposal will undermine the rationale for investors to risk
their capital, if their gains are to be taxed at the same level as
income, instead of the current 18%. Savers will no longer have an
incentive to invest directly in quoted companies and other risk
assets. There is clearly a long term need for the UK
population to borrow less and save more, which this measure would
appear to discourage.
Capital Gains Tax is a voluntary tax and so if people choose to
avoid paying CGT they will simply not sell their assets. The higher
the level of CGT, the more this will happen in our experience of
private investors – ironically denying the Government of not
simply the extra revenue it hopes to gain from the higher tax rate,
but also the revenue it currently collects.
However, we understand that the Government does need to act to cut
the deficit; and that the current system is being used by some very
high earners to be paid in share options (on which they pay CGT) so
as to avoid paying income tax. If the system is to be reformed, we
believe it is critical that the annual exemption is not changed,
and that capital gains are calculated to reflect inflation.
The annual exemption. Reducing or removing the
current £10,100 annual exemption will hit smaller investors
with very little additional revenue to the Government. In 2007/08
the amount of gains by individual taxpayers up to the then
£9,200 allowance totalled £165 million - which is just
0.8 per cent of total gains by individual
taxpayers3. Removing the annual exemption will hit
small investors who put their money directly into shares, but
choose to sell their holdings in one company and buy in another for
portfolio management reasons. They will be effectively locked into
holdings, making the market less fluid and reducing the ability of
individuals to manage their investments, or, forcing them to use
more expensive investment vehicles such as offshore bonds, which
are not subject to CGT.
Indexation. The current proposal does not
mention rebasing the value of securities, or indexation or
re-introducing taper relief. This means that savers’ capital
gains will also include any inflationary increase built into their
valuation since 1982. So, even if there was no real increase in
value, private investors could be taxed at their highest rate on up
to 28 years of inflation. With the 40% tax band starting at just
£43,875, it will trap many people in the UK and vastly
increase the costs and complexity of collecting CGT.
When Nigel Lawson raised CGT to be in line with income tax rates
(25% and 40% at the time) in the 1980s, he addressed this iniquity
by exempting all gains made before 1982, and then applying
indexation. Given annual RPI inflation has just hit 5.3%,
indexation certainly needs to be considered again or that existing
holdings should be rebased to an appropriate date, so that private
investors will not be taxed on any inflation built into their
investments.
Reducing the annual exemption or reintroducing difficult
indexation calculations would significantly increase the complexity
of the tax system for smaller investors and as a result have an
effect on the costs for HMRC in collecting a large number of small
receipts.
Brewin Dolphin is one of the largest investment managers for
private investors with 41 offices throughout the UK. The Group
manages over £23 billion for 130,000 private clients. We will
do all we can to persuade the new government to modify these
alarming proposals, so that private investors and savers will not
be overly penalised in a bid to stop high earners converting income
to capital and that the management of investments will not be
stifled by the tax regime.
1 http://adamsmith.org/files/capital-gains-tax.pdf
2 http://www.libdems.org.uk/siteFiles/resources/PDF/Tax%20Plans%20-%20Briefing%20Document.pdf
3 http://www.hmrc.gov.uk/stats/capital_gains/table14-2.pdf
-ENDS-
For further information please contact Charlotte Black,
Head of Corporate Affairs on 0845 213 3331