Overview
A new report by Centre for the Analysis of Taxation (CenTax) finds that few UK policies have faced as turbulent a history over recent decades as Capital Gains Tax (CGT). They find the current CGT regime is the product of a series of contradictory reforms that have rendered the rules needlessly complex, inefficient, and unfair. Laying out a roadmap for much-need change, this report recommends a comprehensive package of CGT reforms going beyond changes to the tax rate. They use de-identified tax data accessed via His Majesty’s Revenue and Customs (HMRC) to provide estimates of the revenue and distributional impacts of these recommendations. Importantly, their policy proposals include changes to the tax base that will shut down opportunities for tax avoidance and improve investment incentives and growth. The report emphasises that these measures are essential alongside any increases in the tax rate in order for CGT reform to be effective.
The report finds that a comprehensive reform would raise an additional £14bn in total revenues, whilst simultaneously taking over 100,000 people out of CGT altogether. It would also remove many existing opportunities for avoidance and improve incentives for capital investment.
Key findings
The report proposes a package of five reforms:
1. equalisation of CGT with Income Tax rates, reducing avoidance where people use companies to convert income into gains
2. introduction of an investment allowance, thereby cutting the effective tax rate for 51% of CGT payers (and leaving it unchanged for a further 7%) while improving investment incentives
3. removal of uplift at death, which currently allows assets held until death to escape tax, distorting investment incentives
4. introduction of rebasing on arrival and deemed disposal on departure, which ensures that the gains people make whilst living in the UK are always taxed in the UK, removing the ability to leave without paying
5. increase the generosity of the treatment of losses, giving more support for genuine risk-taking by ensuring that the government shares in the downside as well as the upside from risky investments
Key recommendations
Andy Summers, Director of CenTax and Associate Professor at LSE, said:
“Our proposed package of reforms is about much more than just raising rates. In fact, there’s a big risk that if this is all the government does in the upcoming budget, it will seriously backfire. There’s big money available, but only if the government is bold and takes on major reform.”
Arun Advani, Director of CenTax and Associate Professor at University of Warwick, said: “While economists usually emphasise the trade-off between equity and efficiency, CGT is so badly designed that a complete overhaul would make it fairer while also being good for growth. That would make it worth doing even without the extra money we would also raise.”
Andrew Lonsdale, Research Economist at CenTax, said:
“At the moment, over the course of a decade, 97% of people won’t pay CGT. The effects of this reform would be to benefit even the majority of those who do. On the other hand, those who would lose out the most are currently using the preferential CGT rate to reduce the tax on their income from work.”
Further reading