Save content
Have you found this content useful? Use the button above to save it to your profile.
Call to equalise tax rates on capital and income | accountingweb
iStock_styf22_equalise

Call to equalise tax rates on capital and income

by

Increasing tax on capital gains would raise around £8bn for the Treasury, Dan Neidle of Tax Policy Associates tells Rebecca Cave.

4th Nov 2022
Save content
Have you found this content useful? Use the button above to save it to your profile.

Rebecca Cave spoke to Dan Neidle of Tax Policy Associates about his latest policy paper on reforming capital gains tax. He argues that increasing tax on capital gains so it applies at the same marginal rates as tax on income would raise around £8bn for the Treasury.

Why are the rates of capital gains tax (CGT) so much lower than income tax rates?

It’s a historical thing. When CGT was introduced in April 1965 it came in at a flat 30%, which was significantly lower than tax on income at that time. Before 1962, when Financial Secretary Anthony Barber introduced a speculative gains tax, capital gains were not taxed at all.

The rate of CGT remained at 30% until 1988, when Chancellor Lawson equalised it with the taxpayer’s highest marginal income tax rate. 

From April 2008 the Labour government severed that link with income tax and set a flat rate of CGT at 18%. Although Chancellor Brown did fiddle around with various CGT reliefs. 

Register for free to continue reading

It’s 100% free and provides unlimited access to the latest accounting news, advice and insight every day. As well as access to this exclusive article, you can:


Content lock down, tick icon

View all AccountingWEB content


Content lock down, tick icon

Comment on articles


Content lock down, tick icon

Watch our digital shows and more

Access content now

Already have an account?

Replies (18)

Please login or register to join the discussion.

avatar
By Hugo Fair
04th Nov 2022 17:00

If he's arguing for "increasing tax on capital gains so it applies at the same marginal rates as tax on income", then I reckon you've failed to ask him the most obvious question ...
... "does 'tax on income' in this context include NICs?"

If so, the squeals will be heard from many groups of self-interested representatives - but if not, it's really just tinkering with the old 'earned vs unearned income' topic of the last 60+ years.

Thanks (1)
Replying to Hugo Fair:
avatar
By Hugo Fair
04th Nov 2022 17:08

Oh, and I think Dan needs to declare the auspices under which he's making these proposals.

A passing nod to equitability is fair enough - but all taxation has always had a major element of social engineering at its heart.
And this needs to be transparent when attempting to judge any changes not just from a perspective purely focussed on tax take (if only as a balance to the inherent risk/unpredictability of such financial forecasts).

Thanks (2)
avatar
By Paul Crowley
04th Nov 2022 17:09

Only £8B?
And all from Tory donors?
No chance
But think from Rishi's position. Those that claim non dom and chuck assets into havens are not involved (you know, the intelligent people) so maybe.

Thanks (1)
avatar
By Justin Bryant
04th Nov 2022 17:24

DN is sounding more like RM every day.
https://justicefortaxesnetwork.wordpress.com/

Thanks (3)
avatar
By adjadj
04th Nov 2022 18:09

It is well worth reading the 2021 Warwick Economics research paper by Arun Advani noted in the article. It discusses the challenges of changing things to accommodate the natural lumpiness of capital gains; dealing with inflation and the preemptive actions by tax payer knowing that CGT change will occur in the next year of so.

Thanks (1)
avatar
By Winnie Wiggleroom
07th Nov 2022 05:56

b-b-b-but hold your horses there, the activity of investing is a very different thing to the activity of earning income so why should it be taxed the same - and if you are going to do that then you would have to allow capital losses to be offset against income tax as well. As for people "turning income into capital" there are other ways of dealing with that instead of throwing little Jimmy out with the dirty old bath water.

Its a similar argument some people try to make about aligning taxes for employed and self employed people - they are not the same thing though are they.

Thanks (1)
Replying to Winnie Wiggleroom:
Lone Wolf
By Lone_Wolf
07th Nov 2022 09:38

"and if you are going to do that then you would have to allow capital losses to be offset against income tax as well"

Not necessarily. Property losses can't be offset against other income. Capital losses could be treated in exactly the same way.

Thanks (0)
Replying to Winnie Wiggleroom:
avatar
By rememberscarborough
07th Nov 2022 14:44

There are very few genuinely self-employed people with most just declaring themselves as such just to reduce the amount of tax and NI they have to pay. If they had to pay more tax than employed people I doubt you'd find a single self-employed person in the country!!

Thanks (0)
Replying to rememberscarborough:
avatar
By Winnie Wiggleroom
07th Nov 2022 15:46

rubbish, we act for hundreds of genuinely self employed people, the majority of them work very long hours, experience very stressful times and they are usually the last ones to be paid, sometimes they are never paid at all. I could go on, but one thing they are most definitely not is the same as an employee!

Thanks (5)
avatar
By North East Accountant
07th Nov 2022 11:18

What a massive disincentive to investing for the long term if gains are taxed the same as income.

The government want to encourage recyling....so if they do align them....bring back taper relief.

Thanks (1)
avatar
By RFL H
07th Nov 2022 14:55

Most capital gains arise after many years building a business or holding an asset - it would not be equitable to tax them at the highest marginal rate in a disposal tax year without taking both inflation and the years the investment was held into account.

Thanks (6)
avatar
By Ian McTernan CTA
08th Nov 2022 13:20

I wouldn't be totally against this, provided indexation allowance is brought back in. Without indexation this would be a terrible idea- one of the reasons CGT is lower is because it recognises that part of the gain is related purely to inflation.

Of course, we would see a huge new industry spring up of trying to make gains fall into the 10% bracket...

Quoting the IFS as a source of wisdom these days...here's my take on investment and reduction if you raise the rate: instead of having 80% of my money left to reinvest into the next start up or small new company (and remember this is extremely risky), I'll now have 60%. That's 25% less supporting jobs, investment, etc and instead being swallowed by the very inefficient civil service.

Will it discourage investment- of course it will!

And it seems to have ignored the rather obvious. If I can shield my investments within a Limited company that's a 25% rate. More attractive the higher the CGT rate is. If you raise the rate for the largest taxpayers they will find ways to reduce or eliminate the tax entirely- most feel 20% is OK as a reflection of the risk they took, less inflation, but at 40% UK would look a lot less attractive for global funds.

AE has always seemed a strange beast, replacing it with a threshold allowance of £2,000 would make sense.

Thanks (2)
Replying to Ian McTernan CTA:
avatar
By adjadj
08th Nov 2022 19:06

I have owned a rental property for some 20 years as part of my pension planning
It value in that time has grown from 100 to 181. However inflation has grown from 100 to 166 in the same time.

If I sell the CGT is based on a gain of 81 but 66 of that is inflation!

Thanks (1)
avatar
By AndyC555
09th Nov 2022 08:07

The answer to everything is MORE TAX

Thanks (0)
Replying to AndyC555:
avatar
By Ian McTernan CTA
09th Nov 2022 14:23

That's the problem with an ever- growing state, you have to raise more and more tax to pay for it.

Even 'austerity' failed to reduce overall spending, just slowed it down a bit.

But of course as long as someone else pays for it (usually the ones who work hardest and take the most risk).

Thanks (0)
avatar
By adam.arca
09th Nov 2022 19:06

I think we have to accept that the political imperative is to equalise tax rates. When even Tories are floating the idea, the game is up and the morons have won on this one.

Like Ian, I’m not totally opposed to the idea of removing/ reducing the AE or even, actually, to the idea of equalised tax rates if:

* indexation were re-introduced to wipe out inflationary gain
* top slicing were introduced to mitigate against realising gains in the “wrong” year

The chances of getting either of those, let alone both, seem unfortunately distant given the minuscule understanding of tax that the average politician / journalist / twitterista has.

Thanks (0)
avatar
By Justin Bryant
11th Nov 2022 11:00

This recent DN TJ article is misconceived.

https://www.taxjournal.com/articles/ated-time-to-raise-the-rate-

Look at this bit for example: "Sometimes it is simply because ATED is way too small to undo the stamp duty saving from enveloping."

Ignoring the pedantic fact that he means SDLT and not stamp duty, any SDLT saving is for a future buyer (of the company) and that is very unlikely to be shared with the vendor shareholder (by way of a higher sale price compared to an asset sale), and anyway all else being equal buyers prefer to purchase an asset rather than a company with a "history" (that will likely negate any SDLT saving).

Also, and in any event, DN should know these structures were done historically for IHT planning (not SDLT planning) and are often far from straightforward to unwind (thanks to there being no de-enveloping reliefs) and it is a bit disingenuous for him to overlook all that.

Thanks (0)