Capital gains tax (CGT) is currently both too high and too low. It taxes investors at too high a rate when they’ve put capital at risk, only to see it eroded by inflation. But it enables a very low rate of tax for people who haven’t put capital at risk, but are able to pay capital gains tax (rather than income tax) on what’s realistically employment income.
We can fix both these problems by raising the rate but reforming CGT so investors pay a lower effective rate. That could be pure tax reform, or it could potentially raise up to £14bn. Or – my preference – it could be used to cut the rate of income tax and also raise around £6bn. This article explains how.
This Government was elected on a platform of kickstarting economic growth. It has a large majority, and four or five years until the next election. It’s a rare chance for real pro-growth tax reform. That’s all the more necessary if we are going to see tax rises.
We’ll be presenting a series of tax reform proposals over the coming weeks. This is the fourth – you can see the complete set here.
This article is based heavily on a recent IFS paper by Stuart Adam, Arun Advani, Helen Miller and Andy Summers, and a Centax policy paper by Arun Advani, Andy Summers and Andrew Lonsdale.
The proposals here are also consistent with those in the Mirrlees Review, the magisterial 2010 review of the UK tax system chaired by Nobel laureate James Mirrlees.
The rate of CGT is too low
Capital gains tax will raise about £15bn this year.
The highest rate is usually 20%, but it’s 24% for residential property and 28% for the “carried interest” which private equity fund managers receive from their funds.
That’s a lot less than income tax, where the highest rate is 45% (48% in Scotland).1Leaving aside for now the very high top marginal rates that can apply. There’s an even greater gap with tax on employment earnings, where the 45%/48% top rate of income tax is on top of 2% employee national insurance and 13.8% employer national insurance.
This creates two problems.
First, many people think it’s intuitively unfair for a wealthy person making a large gain on their shares to pay less than half the tax rate of someone with normal employment income.
Second, it creates a massive incentive to transform income into capital gains, to reduce your tax. For people who run a business in their own company, this can be as simple as: don’t take dividends out of the company, take loans from the company for now, and in the long term expect to sell the company and make a capital gain. There are many more complicated schemes.
So we should raise CGT.
The rate of CGT is too high
Economic theory says that, if investors put capital at risk, we shouldn’t tax them on the “normal return” (i.e. the risk free return, broadly equivalent to bank rates). If we do, we discourage investment – the investor has done worse than if they’d put cash in the bank, but we’re taxing it anyway.
We should instead only tax the “super normal return” (i.e. if an investor’s investment pays off).
CGT does the opposite of this, because no allowance is given for inflation.
Take an example where I make a less than normal return. Say I bought an asset for £1,000 in 2014, and I sell it for £1,250 today. On the face of it I’ve made a £250 gain. But inflation since 2014 accounts for £230 of that “gain” – I’ve really only made a gain of £20. So if I pay 20% capital gains tax on £250, that equates to an effective tax on my “real” gain of 250%.
The longer an investor holds an asset, the greater these effects become. If the investment doesn’t pay off, I’ve made no money (in real terms), but pay tax anyway. I may decide I’m better off spending the money.
Another bad feature of CGT is that I’m taxed on any gain, but if I make a loss then I can’t use that loss to reduce my general tax burden.2You can use a capital loss against a capital gain, but only a capital gain – not normal income. HMRC takes a slice out of the upside (fair enough) but won’t share in the downside (unfair).
All of this means that CGT in its present form discourages investment, particularly long term investment. It acts as a disincentive to people putting capital at risk, which is something we want to encourage.3NB this is only for UK residents; non-residents aren’t subject to UK capital gains tax, except on land and property.
By contrast, take an example where I make a super-normal return. Say I buy an asset for £1,000 last week, and sell it for £2,000 today. The normal return is (almost) nothing, and I pay 20% CGT on my super-normal return.
This is not how a tax system should work.
So we should cut CGT.
How to raise and lower CGT at the same time
How do we cut CGT for people putting capital at risk, but raise it for others?
Surprisingly that’s simple: we simply increase the rate, but create a new allowance for the “normal return” on the original investment.
We used to have an allowance for inflation; this would work precisely the same way, but with a different rate. And in the internet age, applying an uplift to acquisition prices in peoples’ tax returns is trivially easy.
Say we raise the rate to 40% and create a normal return allowance:
- In the first example above, where my gain is swallowed by inflation, the normal return over 2014-2024 would be something like 40%. So we have to compare my acquisition cost uprated by the normal return (£1,000 x 1.40 = £1,400) with my sale price (£1,250). I’ve made a loss – no CGT to pay.
- In the second example, the rate increases from 20% to 40% – a sensible result.
So we have succeeded in cutting and raising CGT, at the same time.
This is too complicated. Why not just raise the rate?
If you take the current top rates to 45% then simple arithmetic suggests that would raise about £14bn per year. Why not?
Because it would be a very bad mistake.
It would greatly exacerbate the current effect of CGT to discourage long term investment.
It also won’t raise anything like the £14bn figure. It could lose money
Simple arithmetic often fails to sensibly estimate the yield of tax changes, because it doesn’t take into account “behavioural effects” – people doing things differently, in response to the tax change.
The £14bn figure comes from an Office of Tax Simplification paper, which makes clear that the behavioural effects would be extreme:
What are these behavioural effects? Some mixture of:
- If you announce a CGT change in advance of it taking effect (which is what’s always happened in the past), then people sitting on large unrealised gains can sell their property before the rate changes. They “accelerate” their gain.
- Once the change comes into effect, people who want to sell could take the view that the rate is bound to come down again soon, and “defer” their gain. This is particularly likely if there have been many recent changes in tax rates, or the Government is not expected to last many more years.
- What if someone has a very large gain (e.g. an entrepreneur about to sell their company for billions of pounds), but can’t sell before the rate changes? They have another option. They can leave the UK for somewhere that doesn’t tax foreign gains (and many countries fit the bill here). Then sell and pay no tax.
- There’s a very similar result if, instead of leaving the UK, a taxpayer dies. When the children (say) inherit the asset (which will often be exempt from inheritance tax), all the historic gain is wiped out. Any future sale by the children is taxed on the capital gain from the point they inherited. So an elderly investor facing a CGT bill has a powerful incentive to simply not sell their assets.
This isn’t theory – we can see these effects with each of the many, many, changes to capital gains tax over the last 25 years. Massive taxpayer responses:
CGT is particularly susceptible to these issues, because people control when they sell assets.
There’s more evidence of that in a recent paper by Arun Advani, Andy Summers and others. People who’d received income into companies were liquidating them to make a capital gain. Then the Government announced that, from 6 April 2016, this structure would no longer work. That prompted a huge rush of people liquidating companies to beat the deadline:
And this is why HMRC’s “ready reckoner“, showing the effect of changing tax rates, shows that an increase to the top rate of CGT will lose significant amounts of revenue. That was the problem with the Green Party’s general proposal to raise the rate.
The lesson is: any increase in capital gains needs to be made very carefully indeed.
How to avoid leaking tax
There is a significant risk of tax leakage, as taxpayers think they’ll lose out and take steps to avoid the new higher rate. So any rise in CGT needs to be accompanied by a policy package:
- There should be an “exit tax”, like many other countries already have, so that gains made in the UK are taxed in the UK. And, to be fair and coherent, we should stop taxing people who’ve moved to the UK on gains they made before they came to the UK (in the jargon, we should “rebase” their assets when they arrive here). I talked about exit taxes and entry rebasing in more detail here. But, in short, people would usually opt for the exit tax to be deferred to the point they actually sell the asset. Given the number of other countries that have exit taxes – the US, Australia, France, Germany – for us to create an exit tax shouldn’t put the UK at a competitive disadvantage.4Great care would need to be taken structuring the exit tax, so that people couldn’t escape it using double tax treaties. Treaties are supposed to stop people being taxed twice on the same income/gain, but are frequently used to stop people being taxed even once on an item of income/gain.
- Instead of death erasing historic capital gains, anyone inheriting an asset should also inherit its embedded capital gain. So, when they come to sell, they pay on the asset’s original capital gain as well as the capital gain during their own period of ownership. It is only fair that any inheritance tax is reduced to reflect this practical reduction in the value of the asset (so there is no double tax here).
- Capital losses should be fully utilisable against other income/profits.
- Abolish the existing Business Asset Disposal relief, whose initials tell you precisely what its reluctant creators thought of it..
And there has to be an allowance for the normal return, otherwise the rise in tax will harm investment.
The rate change, and the reforms, need to apply immediately after the Budget speech, so people can’t accelerate sales to keep the old rate.
It would be a very serious mistake to increase CGT without these changes. Investment would suffer, and CGT revenues would likely fall. Winners from the new system would benefit; potential losers would avoid the tax.
The authors of the recent Centax paper agree. Andy Summers said:
“Our proposed package of reforms is about much more than just raising rates. In fact, there’s a big risk that if this is all the government does in the upcoming Budget, it will seriously backfire. There’s big money available, but only if the government is bold and takes on major reform.”
Arun Advani is more blunt:
“if they hike the rate without doing anything else that is a terrible idea. It would be easy to avoid and be bad for growth.“
Winners and losers
Tax reforms almost always have winners and loses.
The clear winners are people who hold an asset which has risen in cash terms, but fallen in real terms (after inflation). Right now, they pay CGT when they sell. They’ll pay less tax. Better than that; they’ll get a loss they can use to shelter other income/profits.
Also winners: people whose assets have risen in real terms, but beat the normal return by a sufficiently small amount that they benefit more from the normal return allowance than they lose from the rise in rates. They’ll pay less tax.
So for many investors, large and small, and in shares and property, these reforms represent a tax cut.5An interesting consequence is that anyone in this category who tried to “beat the Budget” by selling property ahead of it, to book a gain before the rate went up, will actually have lost money.
But people who significantly beat the normal return will pay more tax.
We can quantify this. Say the new rate is 40% and the normal return is 5%. Anyone making an annualised return of less than 10% wins from the proposal; anyone making a return of more than 10% loses.6The formula to give the breakeven return for a new tax rate t and normal return n is: (n x t) / ( t – 20%).
You’d be forgiven for thinking that this is such a high break-even point that hardly anyone would be paying capital gains tax under our proposal. The surprising answer (from this Advani/Summers paper) is that nearly half of all capital gains are from shares in private companies where the annualised return was over 100%:
The reason is simple: these are cases where someone starts a company with little or no capital of their own, works for it for many years, and then sells it at a large gain. This wasn’t a return on their financial capital; it was a return on their human capital – remuneration for their labour.7It’s sometimes suggested that this is a special kind of labour, because an entrepreneur is taking a small salary in the hope of a large future payoff, but with a significant risk that payoff never comes. However, this situation is by means unique to entrepreneurs. There are many careers where people are gambling that their small initial income will be compensated for by a large payoff in later years, and therefore they accept the opportunity cost of failing to receive an income from a “normal” job. Think: actors, sportspeople – even some legal careers. But it’s currently taxed as a capital gain, at a lower rate than tax on normal income. It shouldn’t be.
And private equity executives’ “carried interest” is also in this category. They pay next-to-nothing for interests in their funds which become incredibly valuable if the funds succeed. Currently taxed as a capital gain at a lower rate than income but, again, it shouldn’t be.
People in these scenarios would pay significantly more tax than at present. If rates were equalised, it would potentially raise £14bn – and most of this new tax comes from these people.
What does this do to incentives for entrepreneurs?
I would say: very little. Very few people starting a company today think about what the CGT consequences would be when they sell it in say fifteen years time. If they did think about it, they’d sensibly conclude from history that CGT rates today are no guide to where they will be in fifteen years time.
There is very little evidence that lower rates of CGT influence entrepreneurship/company start-up rates – our literature search found none. There is, however, evidence that few entrepreneurs consider CGT when they start up a new business – see this IPPR report.
There is also detailed analysis in the Centax paper (starting on page 32), looking at studies of historic CGT changes in Canada and the US.
But there would be very real and positive effects for investors who put capital at risk. There is good evidence that has a significant and positive effect on startups, because it makes it easier for them to access capital.
What should the rate be?
There are three approaches:
One answer is to simply equalise rates to the appropriate income tax rate (45% for most assets; 39.35% for shares). The Advani/Summers paper plausibly estimates that would raise £14bn.
Another answer would be to raise the rate of CGT less than this. Enough to make the proposals break even, or further – but not to 45%. We’d improve incentives to invest, and reduce the incentive to avoid tax. Raise some lesser sum than £14bn.
But that loses the wider benefits of equalising rates – an end to income-to-capital avoidance, and considerable simplification (given all the anti-avoidance rules that would become irrelevant).
So, if the aim is (at least in part) tax reform rather than revenue-raising, a better idea is to equalise rates but reduce the rate of income tax. For example, cutting all income tax rates by 2% would cost about £14bn – so doing this, and raising CGT to that point would, therefore, be broadly neutral.
Or we could cut all income tax rates by 1% and raise CGT to that point. This would raise around £6bn of additional tax: that would probably be my preference, given the fiscal constraints.
So why not?
There are political challenges here.
The first is that a headline CGT rate of 45% would be the highest in the developed world:
The effective rate would be much lower, because of the normal return allowance, but that may be too subtle a point to affect perceptions.
The second is that the losers, entrepreneurs who start a company with nothing and make a very large gain, have a powerful political voice. I don’t see how these proposals would change their incentives – but I expect many entrepreneurs will disagree.
The third is the risk that politicians see the large figures in the Advani/Summers paper, and think that a simple rise in CGT is the answer, without reform. That would be a disaster.
The fourth is that the numbers are dependent on the Advani/Summers research. I’ve been through it in detail and am convinced; in fact it appears overly conservative in places.8In particular, I think they underestimate the value of the US “buy, borrow, die” strategy because they assume that assets are subject to US estate tax. In practice, nobody of means pays US estate tax – it is even more full of loopholes than our inheritance tax. But I am not an economist. HM Treasury would need to undertake a very serious analysis before committing to this kind of reform.
With these caveats, I’m strongly in favour of proceeding with reform. In the present environment, I’d cut income tax by 1%, raise CGT to the new income tax levels, and then book the c£6bn of proceeds as additional tax revenue.
Many thanks to Arun Advani and Andy Summers.
Photo by Austin Distel on Unsplash
- 1Leaving aside for now the very high top marginal rates that can apply.
- 2You can use a capital loss against a capital gain, but only a capital gain – not normal income.
- 3NB this is only for UK residents; non-residents aren’t subject to UK capital gains tax, except on land and property.
- 4Great care would need to be taken structuring the exit tax, so that people couldn’t escape it using double tax treaties. Treaties are supposed to stop people being taxed twice on the same income/gain, but are frequently used to stop people being taxed even once on an item of income/gain.
- 5An interesting consequence is that anyone in this category who tried to “beat the Budget” by selling property ahead of it, to book a gain before the rate went up, will actually have lost money.
- 6The formula to give the breakeven return for a new tax rate t and normal return n is: (n x t) / ( t – 20%).
- 7It’s sometimes suggested that this is a special kind of labour, because an entrepreneur is taking a small salary in the hope of a large future payoff, but with a significant risk that payoff never comes. However, this situation is by means unique to entrepreneurs. There are many careers where people are gambling that their small initial income will be compensated for by a large payoff in later years, and therefore they accept the opportunity cost of failing to receive an income from a “normal” job. Think: actors, sportspeople – even some legal careers.
- 8In particular, I think they underestimate the value of the US “buy, borrow, die” strategy because they assume that assets are subject to US estate tax. In practice, nobody of means pays US estate tax – it is even more full of loopholes than our inheritance tax.
34 responses to “How to reform capital gains tax and cut income tax”
I am a small landlord, I pay basic rate incime tax.
I have a property I owned for over 30 years that I wish to sell as it is now a long way from home and I could give local tenants a much better service, or invest money in British Companies.
But as the sale proceeds can’t be spread over multiple tax years I will be charged capital gains tax at a significantly higher rate then I pay income tax on the rent. So the property will not be sold to a likely 1st time buyer.
Reading through all of the various taxes and papers you have written – they are excellent and much appreciated. It is depressing though that each Tax illustrates unhelpful complexity, messy impacts,areas of inequality and significant scope to ‘avoid’ tax if you can afford to use Trusts / Offshore etc.
It is depressing that the new Government hasn’t (yet) set out a 10 year view to simplify and streamline our Tax Code. You have made excellent suggestions – and pointed out areas like an ‘Exit’ Tax which others have. In NHS etc. they seem happy to talk about 10 Year Plans – are we wrong to hope for a genuine 10 Year Tax Simplification Plan – as they have the Mandate and Majority ?
Very interesting and provocative post, thank you Dan.
Re Entrepreneurs’ views of CGT rates. I am a serial entrepreneur myself and know many others. I do tend to agree with your assertion that higher CGT rates don’t themselves affect incentives/motivations to start a business. However there are two important ramifications in my view:
1) Choice of country. Some entrepreneurs, serial entrepreneurs in particular (who tend to be more successful), make quite judicious choice of *which* country to establish their business in. As your old sparring partner Zahawi appeared to do. Lisbon is clearly attracting many formerly UK based tech businesses, for instance. The UK is in competition with other jurisdictions and entrepreneurial human capital can be very mobile.
2) Mood music. There is something about the wider climate / mood of support / optimism which comes from the signalling effect here. I remember when Gordon Brown created taper relief for entrepreneurs – it lifted spirits and confidence across the entrepreneurial community.
These seem like sensible ideas to me. Certainly worthy of being part of the debate on CGT. I’m not sure what you’ve done to upset Richard Murphy over on his blog but he’s having a right go, not only at these ideas but also writing and allowing snide digs at your career, how you run Tax Policy Associates and even that money has corrupted you!
Are you advocating CGT payment on prbate valuations on death or that the CGT is paid when the inheritors sell assets ?
the latter!
And how does someone who inherited an asset from someone who inherited the asset from someone who inherited the asset and so on know what the original cost is or when it was acquired of allowed the “normal” gain? Easier for quoted shares but all but impossible for some other assets
One would have to permit reasonable estimates of market value to be used in such circumstances.
Some comments Dan:
1. “but if I make a loss then I can’t use that loss to reduce my general tax burden” – you can get income tax relief for a loss in a qualifying trading company (see self-assessment helpsheet 286 for an easy explanation)
2. “If you announce a CGT change in advance of it taking effect (which is what’s always happened in the past)”. I believe that the rate increased from 18% to 28% effective from 23 June 2010, a day after the ‘emergency’ budget. I guess that is a few hours ahead.
3. “What if someone has a very large gain … They can leave the UK for somewhere that doesn’t tax foreign gains (and many countries fit the bill here). Then sell and pay no tax” – yes, although there is a five-year temporary non-residence rules.
4. “Instead of death erasing historic capital gains, anyone inheriting an asset should also inherit its embedded capital gain”. There is also a bit of avoidance where one spouse (A) owns an asset that is standing at a gain and the other spouse (B) is terminally ill. A gives the asset to B tax-free, who then dies and the asset goes back to A pursuant to B’s will. This gets rid of the gain. The GAAR guidance (D19) suggests this is “standard tax planning”.
5. “Abolish the existing Business Asset Disposal relief, whose initials tell you precisely what its reluctant creators thought of it..” It’s been tightened up from the original ER rules so I’m less concerned about it. However, I have seen situations where the job that someone has to get them into BADR is, politely put, completely made up and without any purpose other than tax relief.
6. In the old days you had a March 1982 rebasing for old assets. How will you deal with that? There’s probably a lot of old information out there for March 1982 but it’s now a long time ago.
7. “And private equity executives’ “carried interest” is also in this category. They pay next-to-nothing for interests in their funds which become incredibly valuable if the funds succeed.” And in some cases pay literally nothing (and reported as nothing on the online version of the old Form 42 employment-related securities return).
8. “But that loses the wider benefits of equalising rates – an end to income-to-capital avoidance”. But there is still an income-to-capital advantage because it is easier to handle the timing of disposals.
In the example where the normal return exceeds the actual return (400 vs 250) you state there is no tax to pay, but would the implied “real” loss of 150 be deductible?
Or is loss relief only for nominal value losses – a bit like how pre abolition indexation allowance could reduce a gain but not generate or increase a loss?
CGT like IHT is a ridiculously complex tax that raises about 0.1% of government revenue, that is it is lost in the roundings, and with IHT absorbs probably too much HMRC resource. Abolish both, bring back investment income surcharge (5%?) and make stamp duty the liability of vendor, which I agree it is a pretty awful tax, but is a simple tax on capital that is transactional and does not generally rely on valuations
I posted this on another post.
People often forget that taxes have real-life consequences.
I spent many years saving, living on a tight budget, missing out on life, and staying at home to save on rent, worked summer jobs, all to get on the property ladder and afford a modest 3 bedroom home.
What I didn’t know at the time was that the recently built houses across the street were owned by a housing association, which had placed several dangerous families there – people with criminal histories, including those who had been to prison. I spoke to my new neighbour, who told me that he lived elsewhere and that he had been driven away from his own house, after being broken into five times. I later realised that all the homes on my side of the street had burglar alarms. Some even had metal bars on their side windows for extra protection.
I experienced antisocial behaviour, harassment, and threats of violence. At times, one family with a dangerous aggressive dog would wait outside my home. There was a group of youths would intimidate me. The police didn’t seem to care, even though they knew the type of people living across the street.
A few bad families can drag the neighbourhood down. The youths would go in groups and drag other kids in their rampage.
Socialism is a failure. It does n’t hold recipients to the highest standards.
I couldn’t understand it – these lucky people were given brand-new homes, so why target the very taxpayers funding them? It became too dangerous for me to live there.
I was stuck, though. I had a mortgage with a tie-in period, so I couldn’t sell, and it felt too risky to stay. I hoped the area would improve over time.
I decided to rent the place out, which barely covered my costs.
As house prices went up, I realised that, through no fault of my own, if I sold, I’d fall down the property ladder—from a three-bedroom home with a garden to a two-bedroom flat, once capital gains tax was factored in. How is that fair to me?
Yes, on paper, it might look like a profit, but in reality, I’d be losing a bedroom, a garden, and gaining expensive service charges that come with most flats.
I’ve waited through multiple chancellors, hoping they would reduce or eliminate capital gains tax, or at least make it less painful.
Instead, they’ve made it worse by increasing taxes on landlords (like with Clause 24 and buy-to-let restrictions) and tightening regulations.
I have never used my CGT allowance, but why can’t they allow you to bundle up your unused allowance.
I makes me angry to pay more tax, and to hand it over to people like those who caused me misery.
In Germany there is no CGT after 10 years.
Why not set the CGT rates to the real tax on earnings (Income tax + National insurance). So 28% for basic rate, 42%…
Use the cash from your 1% Income tax reduction to cut National Insurance instead (maybe by a bit more that 1%).
Moves closer to the ideal of abolishing NICs.
I like the overall concept. Particularly the rebasing /charging on exiting the UK tax net. Australia I recall did this in the 1980’s when they brought in CGT.It made Australia an attractive tax haven for those leaving the UK with assets with significant pregnant gains.
In practical terms it would work well with single assets but shareholdings built up with multiple purchases and gains over the years would present computational problems. Back to the old pooling rules?
If CGT losses can be set against income tax then would that not provide an incentive to sell all loss bearing investments ahead of 5th April but retain those that are in gains?
This could be very costly to the Exchequer. Particularly so if you were indexing the losses.
The death CGT uplift is overdue for reform and as you say should be balanced by an IHT reduction.
1) From a purist perspective I think you need to take into account the historic dividend yield if applying an indexation allowance to determine if an investor has made gains exceeding the risk free rate which clearly complicates the calculation. The holding period yield would have taxed at a maximum of 39% vs 45% for bank interest, so there is already a small reward for holding a “risk” asset. 2) In terms of behavioural impact and transitional costs, the reintroduction of indexing would also provide investors with a material opportunity for tax loss harvesting, both on legacy portfolios where laggards could be realised at a “loss”, and going forward as the return bar for generating real terms gains would be materially higher given the historic equity outperformance is c 4% vs 9% total return. (Dimson et al.) Given the SD of eg S&P500 annual returns is 18% (1yr) or 15% (10 yr) and for individual stocks the SD will be higher. It would be instructive for HMT or a wealth manager to model a 10-20 EFT portfolio over say a 20 year holding period assuming annual tax optimisation via tax loss harvesting to see what the actual revenue impact was.
And what about other assets, such as property. If the “normal” return has already been received from receipts of rental income, presumably it is not deducted again when calculating the gain to be taxed?
What about second homes where the return is through personal use rather than market rentals? Include a deemed return for the time it was available to the owner to be used?
If you leave money in the bank and it earns interest, you still get taxed on that “normal return” without any inflation allowance. So wouldn’t excluding that from CGT be distortive unless that was also changed?
You’re not putting money at risk so the argument about incentivising/disincentivising investment doesn’t apply.
There is a distortion here, but it’s a good one!
Risk isn’t a binary thing though – I know money market funds get taxed as income but there must be some assets on the other side of the line that don’t involve taking much actual risk.
Eminently sensible. I hope someone at No.11 is reading this.
Hi Dan
1. Perhaps worth amending footnote 2 to say “except on land and property”, quite a big asset class overall;
2. regarding the CGT/IHT uplift on death, is the main argument against this a practical one about having to get and maintain valuations from potentially decades previously?
1 thank you – great point
2 probate valuation = CGT valuation
Hi, on 2 I probably didn’t use clear enough language. Wouldn’t you need to keep the details of the acquisition cost (which could be decades previously)?
Dan. date of death CGT value is market value at date of death.
OK to establish for quoted shares but not other assets.
Probate value is only CGT cost if IHT has been ascertained I.E. only if IHT is payable AND value formally agreed with HMRC – this does not always happen.
If it is accepted that unquoted shares qualify for IHT BPR then no value is ascertained for IHT
An exit tax is an interesting idea but it would be extremely hard to identify and collect gains from people who leave the country especially if they haven’t realised the gains so don’t have the funds to make the payment. Also valuations at exit would be hard to determine without an event and would be down to individual interpretation and hmrc would probably spend more than they make in sorting it.
Also this would disinsentise people setting up businesses in the uk in the first place.
apologies I should clarify that taxpayers could opt for deferral until actual disposal, at the price of giving a promise to pay the tax. That’s how most other exit taxes work. Given the number of other countries that have exit taxes, it shouldn’t put the UK at a competitive disadvantage. The US, of course, has the mother of all exit taxes.
This is pretty good.
Can you please try to work in the specific words “multiplicative” and “additive” for the dynamics of wealth change to do with investment and labour respectively?
We often go on about this but it needs wrapping in some way that is palatable for lay people. We note, wealth is X -> X + dX per dt. So that is capital X turns into X (1 + epsilon) in time dt.
And Labour is null -> dX per dt. So that is you exchange your time dt for dX in delta capital in time dt.
This is almost always ignored. The “rate” of labour is in units of [ currency / time ].
The “rate” of investment grown (CAGR) is in units of [ 1 / time ].
This all seems trivial, but it should be the basis of understanding what exactly our “control” goals are with tax policy if we forget about the desire to fund government without inflation.
But too often we see lay-people (journalists and politicians) comparing rates of tax capital gains and rates of tax on income as if they are comparable. They are apples to oranges and it is miseducation to even allow this kind of speech to persist in an environment that children might hear.
It is total nonsense and it must end.
Of course, we *can* understand why for historical practical reason we have the taxes we have. But that is a different matter than arguing about “what is fair” based on nonsense comparisons of apples to oranges.
thanks!
I try to keep the articles very accessible, but if you have some suggested wording I’ll certainly see if I can include it.
We used to have indexation allowances, and they worked well. How about a higher rate for a house that was formally owned by the local council?
Please look at the transfer of profit by UK companies owned by offshore funds, when they Provide loan Capital to the UK companies at a much higher interest rate than normally provided by UK banks to companies.
I would be interested to hear your thoughts on unrealised capital gains. It usually makes sense to raise money against assets instead of disposing of them, as its tax free. However, making it so that raising capital in excess of base cost a taxable event would raise a lot. E.g. house bought for £500k, rises to £900k of value, and is used to borrow £690k – tax should be paid on the (£690-£500k).
The argument against unrealised gains is that obviously there is no cash to pay for tax, and the final gain is uncertain. However, borrowing against it means that there is (much) more uncertainty, and ofcourse cash.
Borrowing against an asset comes with costs. The banks charge an arrangement fee and you are essentially “renting” money from the bank against that asset. he bank also pays taxes on the interest they earn from the loan.
Additionally, early loan repayment may result in penalties.
The people who need to borrow money are going to be cash poor, so not sure how people can be expected to pay tax.
Fees, interest aside, borrowing creates a similar cash position to a partial/full sale.
To be clear, this would not force people to borrow, and only when you borrow in excess of your base cost.
I disagree that people who need to borrow are “cash poor” – same logic would mean people who are selling are also in the same state.
As a landord, seeing what other landlords do….
I would like capital gains tax on unrealized gains when the increased property value is used to get a larger mortgage.
This will make it a litle harder for landlords to use increased property values to drive up the price of other properties….
Also make capital gqins tax a 1st charge against a property with the mortgage not being repaid until the capital gains tax have been paid. Then lenders will take into account likely capital gains tax bills.