Capital Gains Tax - Where next?

A recording of the event is available - here

Introducing this event, CIOT president Glyn Fullelove said Capital Gains Tax (CGT) was shaping up to be a ‘hot topic’ in tax reform in the wake of the coronavirus pandemic.

So it was timely that the CIOT and Institute for Fiscal Studies joined forces for their second online debate of 2020 to discuss the future of the CGT regime and consider options for reform.

Over the course of a lively debate, guests heard calls to increase the tax, were warned of the need to keep rates low to protect investment and promote entrepreneurship, and were also told to be mindful of the need to ensure reform delivers clarity and certainty for taxpayers.

Event chair Helen Miller described CGT as an area ripe for reform, having developed over time into a muddled regime with a myriad of rates and reliefs, but no overall strategy.

Robert Palmer of Tax Justice UK also said the time was right for reform but that economists agreed almost ‘universally’ that immediate tax rises were unnecessary because of quantitative easing and the government’s ability to borrow cheaply.

Despite this, the political case for reform had been made in the Conservatives’ 2019 manifesto – which had attracted the support of working-class voters – with a pledge to limit ‘arbitrary tax advantages for the wealthiest in society’.

A recent Tax Justice report showed broad support for tax rises and a rejection of the austerity agenda of the 2010s, with particular support among Conservative voters, said Palmer.

He suggested the equalisation of CGT rates with income tax as an option. He said it was ‘deeply unfair’ that someone earning £15,000 per year could pay a tax rate equivalent to the very highest earners who were able to use the CGT regime to their advantage.

Stephen Herring, formerly of the Institute of Directors and now a member of the TaxPayers’ Alliance’s advisory council, rejected this idea. He said the present system helped to encourage investment and entrepreneurship. He also warned of the consequences of discouraging investment and damaging the economy that could come from the introduction of a more punitive regime.

Herring argued for the merger of CGT with Inheritance Tax, saying this would be popular with the public and would help to simplify the tax system. He urged the chancellor to leave a legacy as a tax reformer, a tag he said very few chancellors – if any – had achieved since the days of Nigel Lawson.

Katherine Bullock, a barrister at Field Court Tax Chambers, said that CGT was ‘one of the more straightforward taxes’ dealt with by practitioners, in part because the tax was paid by relatively few taxpayers and that many common assets – such as a family home, cars and pensions – were excluded from the regime.

She said realigning income and capital gains would simplify the system, but she was less sure whether it would be seen as either good policy or a source of increased tax revenue. Bullock said changes must be properly communicated and taxpayers provided with the certainty that they were fulfilling their obligations.

Stuart Adam of the IFS said there was a compelling argument in favour of the taxation of income and capital gains at a similar level but he also acknowledged the concern that this could act as a disincentive to investment.

It was with this in mind that he set out a case for reform of CGT based on a restructuring of the tax base, the equalisation of tax rates across multiple sources of income and actions to incentivise investment and entrepreneurship.

Adam said that offering more generous tax deductions upfront (as opposed to on disposal) would help to encourage investment. He said that this needed to be supported with a more flexible regime for capital losses to reduce disincentives for risk-taking.

He also spoke in favour of reforms to abolish uplift at death – which he argued should be considered alongside wider policy debates on reforming the IHT regime and the reform of social care.

The IFS proposals drew a mixed reaction from the panel, with Bullock giving the plan broad support in principle and Herring against upfront tax relief ‘for any investment’.

In the audience debate that followed, questions from the audience focused on the idea of taxing primary residences, the administration of a reformed system along the lines proposed by Adam, twin-track reform of IHT and CGT and the political practicalities of large scale reform.

We’ll find out later this year whether the chancellor is planning changes in this area.

By Chris Young