Dear Office of Tax Simplification, now is not the time for a tax raid

By Duncan Simpson, research director of the TaxPayers' Alliance


The Office of Tax Simplification (OTS) has published its report on overhauling capital gains tax. Much of the press coverage rightly presents the recommendations as radical. But the report itself is more measured than is often suggested.


Most of the recommendations, while bold, are nonetheless contingent on assumed policy objectives. For instance, they say, "if the government considers the simplification priority is to reduce distortions to behaviour, it should either consider more closely aligning capital gains tax rates with income tax rates, or consider addressing boundary issues as between capital gains tax and income tax". But it also recognises the many trade offs surrounding the various policies and adds, for example, that "if capital gains tax rates were more closely aligned with income tax rates, the OTS considers that the government should also consider reintroducing a form of relief for inflationary gains."


This has been somewhat lost in the media reporting. A BBC article states that  "£14bn could be raised by cutting exemptions and doubling rates, according to the review". This isn’t entirely accurate. As the report itself caveats, " is clear that nothing like this amount would be raised in practice, due to behavioural effects (such as people delaying disposals) and other changes that might be made in parallel (such as allowing for inflation)." This is far from the only report to miss this key point. 


So what does the TaxPayers’ Alliance make of the OTS suggestions? First and foremost, now would be an absolutely terrible time to be even thinking about tax rises. And tax rises on investment are the last thing the economy needs. Britain will need entrepreneurs to invest as much as possible, creating jobs as a result and helping to ensure recovery from the current economic carnage.

And there’s another, often ignored, problem with tax hikes. They take the pressure off the government to identify and remove wasteful spending, which should be the priority when books need to be balanced. The upcoming comprehensive spending review must make this a top priority. 


Secondly, reducing the 'annual exempt amount' from its current £12,500 level would, as the report says, snare hundreds of thousands of small investors. As the OTS concede, cutting it to £6,000 would mean 235,000 more having to report a gain (of whom 139,000 do not already complete self assessment so would suffer this administrative headache, too). A reduction to £2,500 would mean 360,000 more (of whom 240,000 would have to submit a self assessment especially for this).


Thirdly, the proposal to remove the 'death uplift' has some merit and might be worthwhile if done in a revenue neutral way. The so-called uplift is the rule that means some types of assets are not chargeable to inheritance tax (IHT) at death and the heir inherits them at the asset's market value on death, for the purposes of subsequent capital gains tax valuations. This creates a distortion to hold these assets until death rather than giving them away as lifetime gifts, or indeed selling them and bequeathing the proceeds. The receipts from removing this distortion could be used to lower the rate of IHT or CGT, for example. We've previously estimated that the cost of death in the UK could be up to £60,773 for some people, with plenty of room for cutting the burden of IHT.


It is welcome that the OTS are bringing attention to aligning and simplifying all the various taxes on income, as the TaxPayers’ Alliance has long recommended. Unfortunately the analysis fails to account for the fact that capital gains on assets where the benefits are taxed as income (such as shares and bonds) are already post-tax - which makes any tax on them a form of double taxation. That's why a neutral tax code would have no capital gains tax on such assets.


Ultimately, the best way to simplify the tax code is to abolish bad taxes outright, including capital gains tax. Failing that, cutting the rate to a flat 10 per cent, as we recommended in June, would strip out much of the complexity by making things like investors' relief and business asset disposal relief redundant.

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