Capital Gains Tax

The Government would appear to be set on a path of increasing capital gains tax from the present 18% to 40% or 50% on all gains on non-business assets, such as shares and second homes. This would be a fundamental breach of conservative principles and manifesto pledges and as such must be condemned and challenged even if it means another General Election. The policy is being forced on the Conservatives by the Liberal Democrats because of their pledge of taking the poorest out income tax - those earning under £10,000 would not pay any tax.

Apparently the planned move is aimed at curbing short-term speculation but there is no doubt that it will harm business and act as a brake on entrepreneurship. John Redwood MP quite rightly suggests that the proposed tax rise should be replaced by a form of taper relief, where the longer an asset has been held, the lower the tax that is paid on it. Mr. Redwood is quoted as saying: "The Government has said it wishes to assist a substantial private sector led revival, and wants to see the enterprise sector create more jobs and homes for rent. The Government needs a policy which allows reasonable freedom for people to invest, encourages those who are responsible and who make provision for their families and their futures, and is fair."

Mr. Redwood suggests tax gains of under a year should be taxed the same as income, but at a top rate of 40%, rather than the current 50.

Longer term gains should be taxed at lower rates of 30% for two year gains, 20% for three years and 10% for four years. He said this would act as "stimulus to long term investment" and boost revenues. He adds: "I would myself go further and offer no capital gains after five years, to send a strong signal to the world's investors that the UK is back in business as a favourable location. I have been swamped with support for these suggestions, both from around the country and from Conservative MPs. It would send a strange signal if a Conservative led coalition government decided to more than double the capital gains tax rate set by a Labour government. It would damage the revenues and be unfair to anyone who saves, is prudent, or who ventures their money for the greater good."

The current uncertainty is causing a number of owners of second homes to sell now before the new tax rates become law. If capital gains tax is increased to 40% or 50% all gains on non-business assets, such as shares and second homes regardless of how long the assets have been held there will be a sharp decline in the number of properties available for rent and a reduction in the number of new homes being built.

Surely this is such a fundamental issue that Conservative back benchers should bring great pressure on David Cameron to adopt Mr. Redwood's suggestions even if it would mean a break with the Liberal Democrats.

Short-term gains on any assets should be treated as earnings and taxed as earnings at whatever rate of tax is applicable to the individual. However "short term" should be defined as one year. Any gain made over a longer period will include inflation which should not be taxed. The purchase of all assets will have been purchased with tax paid funds.

Members - any comments?

 

1 comment(s) for “Capital Gains Tax”

  1. J Sterling Says:

    The Coalition Government has made a very unfair decision to impose a 50% tax on all capital gains. It is also a very stupid decision since the principal effect will be to reduce the tax received from capital gains.

    It is unfair as it does not take into consideration the length of time that the property or other asset has been held and the effect that inflation has had on the apparent gain. The fair way would have been to continue with “index linking” from the time the property or other asset was purchased or far more sensibly use the formula suggested by John Redwood MP. Mr. Redwood’s suggestion would have encouraged investment and kept activity in the market.

    The decision is very stupid since investors will no doubt hold on to their property assets, activity in the various markets will reduce and the tax received by the Treasury will reduce. In addition investors and speculators, traditional supporters of the two parties that make up the Coalition, will become disenchanted and perhaps take their support elsewhere.

    It is clearly easy to talk about fairness but not so easy to substantiate the intentions.

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