Second-home owners, investors and pensioners face paying tens of thousands of pounds more in tax under a review ordered by the chancellor that could raise £14 billion a year.
[Day of reckoning for all the consultancy bills approaches – Owl]
David Byers, Assistant Money Editor | Oliver Wright, Carol Lewis www.thetimes.co.uk
Rishi Sunak’s advisers on tax reform have suggested increasing capital gains tax (CGT) in a move that would particularly affect high and middle-income earners.
He is looking for ways to repair the public finances amid the coronavirus crisis. However, any move on CGT would meet fierce resistance from Tory backbenchers who have warned Mr Sunak that it would be politically disastrous by punishing the party’s base.
At present anyone selling shares, a second home or other assets is liable to pay capital gains tax on the profits they have made from the sale.
Those earning less than £50,000 are charged 18 per cent on residential property and 10 per cent on profits from other assets. For those whose income is more than £50,000 the tax is 28 per cent on residential property and 20 per cent on other assets.
In its report for the Treasury, the Office of Tax Simplification (OTS) suggested that the chancellor bring CGT into line with income tax. This would mean higher rate taxpayers facing a flat rate of 40 or 45 per cent.
In a separate recommendation the OTS suggested the chancellor could reduce the threshold at which the levy kicks in from £12,300 to £5,000. This would double the number falling into the net each year to more than half a million. This would be tripled if he cut the threshold further to £1,000.
Mr Sunak needs to find up to £40 billion a year in cuts or additional revenue after the pandemic, according to the Institute for Fiscal Studies. However, Tory MPs have already expressed strong opposition to any move on CGT. “I think it would be very unwise,” Marcus Fysh, deputy president of the Board of Trade, said. “It would kill off incentives within the economy at a time when we want to stimulate growth. We should be looking at ways of simplifying tax by reducing it.”
Another said: “It has been made clear to Rishi that colleagues will not support it.” A Treasury source played down the report, saying it would not have a bearing on any decision by the chancellor.
The OTS justified aligning the rates by saying that the present disparity “can distort business and family decision-making and creates an incentive for taxpayers to arrange their affairs in ways that effectively re-characterise income as capital gains”.
Bill Dodwell, the group’s tax director, said: “If the government considers the simplification priority is to reduce distortions to behaviour, it should consider either more closely aligning CGT rates with income tax rates, or addressing boundary issues between CGT and income tax.”
Mr Dodwell said that the OTS would publish a second report in the spring, with further recommendations on how the tax can be revised. He stressed that Mr Sunak had not asked him to examine ways of scrapping the capital gains exemption on the sale of main homes, a potentially explosive move.
The government raised £9.5 billion in 2018-19 from 276,000 taxpayers against capital gains of £62.8 billion. Receipts from the tax would continue to be small compared with other levies, suggesting that the chancellor would also have to raise rates elsewhere.
George Bull, a partner at the tax firm RSM, said that changes to CGT would be “attractive to the government”. “In addition to simplifying the tax system, it also promises to dramatically increase the amount of CGT collected each year,” he said.
Nimesh Shah, chief executive of the tax advisers Blick Rothenberg, suggested that the study was politically motivated and went beyond tax simplification, saying: “This report contains more policy direction than any other report I have seen from the OTS.”
A Treasury spokesman said: “We have asked the OTS to examine and provide recommendations on how to make CGT as clear and efficient as possible. Over the last few years the OTS has reviewed nearly all the major taxes but had not yet reviewed CGT. The OTS provides independent advice to the government. It is for the government to make tax policy decisions.”