The capital gains tax (CGT) rise to be announced in today’s Emergency Budget will be counterproductive, according to the director of a respected free-market think tank.
Writing to the Telegraph, Dr Eamonn Butler, director of the Adam Smith Institute, also contends that an antipitated hike in the top rate of CGT from 18% to something approaching 40%, will only penalise prudent middle-income families.
“George Osborne says that CGT must rise because people can avoid income tax by taking their income instead as capital gains, which are taxed at a lower rate,” he writes. “This is wrong. Only 5% of taxable CGT gains come from assets held for less than two years, the sort most likely to be used in such avoidance.
Mr Osborne is right that stern measures are needed now to balance the budget, but a CGT rise will be counterproductive
Dr Eammon Butler, Adam Smith Institute director
“Little of that is actually avoidance: most people simply do not have the option of switching. Hong Kong, where capital gains are taxed at zero, has no problem collecting income tax.”
Prudence penalised
A substantial rise in CGT would be manifestly unfair, he argues.
“The bulk of CGT revenues, 55%, comes from assets that people have held for more than eight years, the sort used by middle-income families to save for their retirement. It is their prudence that a CGT rise will hit.
“Mr Osborne is right that stern measures are needed now to balance the budget, but a CGT rise will be counterproductive.”
Butler is the latest in a succession of business leaders and commentators to raise objections over the coalition’s planned rise in CGT, a policy championed by the Lib Dems in their election manifesto. The Daily Telegraph has also mounted a vigorous campaign against the rise, while many within the Tory party have lobbied the Chancellor, George Osborne, to scale back the plans.
Until the Treasury clarifies its assurances of “generous exemptions for entrepreneurs”, many business owners contemplating selling their businesses will be wondering whether they’ll need to accelerate their exits.
Douglas Broom, head of content for accountancy training and software providers CHH, was one of several people asked by Businesswings which tax rise they thought would be the most damaging. He says: “A capital gains tax rise would have the most damaging effect on small businesses of any tax rise as it would hit entrepreneurs when they sell a business they may have spent years building up. Given that business owners stimulate the economy best by selling and then moving on to a new challenge, it is important to encourage this behaviour.”
He acknowledges, however, that “the government will protect small businesses through some kind of entrepreneur relief.”
Neal Gandhi of international business service provider Quickstart Global believes that even as it stands, the CGT law is seriously flawed. “Perhaps the most damaging tax is one that destroys entrepreneurship and with it job creation and innovation,” he says. “A punitive capital gains tax, particularly one as clumsy as the current one, will do the economy no favours.
“At present entrepreneur’s relief requires that you have been a PAYE employee for at least 12 months leading up to a sale, whereas many owners remunerate themselves via dividends or have no day-to-day role long before exit. Entrepreneurs will need to study the fine print and hold the government to account if they get this wrong.”
Louise Reynolds, director of Property Venture, is concerned about the impact on her clients. “The proposed equalisation of CGT and income tax rates would hit my property-buying clients,” she says. “This would evidently impact business flows for my overseas business.
“People tend to buy overseas property as second homes or investments and these fall under CGT rules when coming to sell. The countries I deal with have double taxation treaties with the UK and so the UK tax system drives the level of taxes UK-based clients pay.”
However, she says, lobbying from business groups might have convinced David Cameron, who to scale back the plans. “I have been a bit relieved to hear that this may not necessarily be the case, in reality when the Emergency Budget is announced next week,” she says.
“I understand some of the lobbying taking place may have changed the government stance somewhat and they may allow taper relief, as there was under previous CGT regimes, or possibly the CGT treatment may not end up being as harsh as first believed.”
In a bid to dispel a perception among many in his party that he doesn’t listen to the rank and file, David Cameron insisted in a Radio Four interview that he was open to a range of views over the issue.
When asked if he would rule out taper relief, which backbencher John Redwood has proposed, the PM replied: "We will listen to the arguments. The process is clear. There's a budget to come. That's when the decision will be made."
Quite how the “generous exemptions for entrepreneurs” will be constituted will remain opaque until 12:30pm today, when the Chancellor is scheduled to deliver the most parsimonious budget since the 1970s.
