Capital gains tax could cost billions of pounds, but the main losers would be rich people who own assets that are not exempt from tax. According to a study commissioned by Chancellor Rishi Sunak, the reduction in tax exemptions and the doubling of the tax rate could raise 14 billion pesos.
This is happening as he seeks ways to cover the enormous costs of the coronavirus pandemic, as well as health care, education, and infrastructure.
In September, he promised that Tory MPs elected would not see the horror show of tax rises come to an end. Capital gains tax is the tax you pay on any profits you make from selling, giving away or selling something you own, such as shares or property. However, the Office for Tax Simplification (OTS) has found that this behaviour distorts behaviour when people try to pay their bills. The government, the agency said, could double the basic rate for taxpayers, which raises the tax to 10%, if it were adjusted to income tax.
Currently, the first £12,300 of capital gains tax-free, but the report also suggests that the increased amount could also rise by reducing the tax-free allowance. A survey of 50,000 taxpayers who reported profits just below that threshold last year also suggested that increasing the amount would cause an increase in the number of taxpayers, and that it could be increased by reducing tax exemptions.
The panel said Wednesday that the current rules are counterproductive and would create “strange incentives.” It can distort the decisions of businesses and families and create an incentive for taxpayers to manage their affairs in a way that defines income as capital gains, “the report said. My jaw dropped when the Office of Tax Simplification suggested that capital gains tax could be more closely aligned with income tax and doubled in a matter of seconds.
Most of us won’t pay it, but if the number of people paying tripled, there would be more than enough money in the bank to pay for everything.
More than 31 million people pay them, bringing in £180billion in 2017-18, but the first £12,300 is exempt. By contrast, only 265,000 capital gains pay tax and they make a profit by selling assets such as shares or bonds. Many of them manage their affairs in such a way that, when the assets are sold and the profit is realised, they can control the tax rate on the profits they have made, even if it is just below the threshold.
Of those who pay capital gains tax, only half pay at a rate of 10%, the highest in the world and the second highest in Europe.
The OTS report says that most of these gains are concentrated in the hands of relatively fewer taxpayers, who pay proportionately less tax than everyone else. In other words, the light capital gains tax system exacerbates the already yawning inequality between the few who can actually earn a capital gain and the many who rarely or never will. If the Government takes up the recommendations, thousands of taxpayers could face a tax rate of just 5% on their profits. The independent auditors also propose to eliminate the rule that allows capital gains taxes to be removed from inherited assets and to end the relief for investors who sell unlisted companies that have been owned for at least three years.
A Treasury spokesman said: ‘The Government’s priority at the moment is supporting jobs and the economy and we thank OTS for their independent report which will be considered in due course. The report was commissioned in July by the Finance Minister of the Ministry of Finance, Sunak Srinivasan, Head of the Tax Administration Office (OTA), and accepts its findings.