Let me offer a little marriage guidance to the new Coalition. Tax is something Conservatives and Lib Dems could fall out over. It is, however, an accident that need not happen.
Deep in Lib Dem DNA is the Robin Hood principle – tax the rich and give to the poor. It is superfically popular, and gives believers a feeling of moral superiority.
Deep in Conservative DNA is the belief that society and the economy work better if you allow people to be successful and to pay their own bills. Conservatives do not see financial success as a crime which the state needs to punish.
These two have in the past come to blows over tax. So can we find a way through today?
The most important tax proposal to the Lib Dems is fortunately a tax cut. They want to take everyone earning less than ÂŁ10,000 out of Income Tax. They claim this helps the poorest. It does not, as the poorest are on benefits and will suffer benefit withdrawal as they enjoy their tax cut.
However, the good news is that most Conservatives are keen cutters of Income Tax, and will happily accept Income Tax cuts through raising the threshold for the sake of the political marriage. One Income Tax cut can serve as well as another.
The problem comes with the other Lib Dem tax proposal, to partly pay for the first. They wish to increase Capital Gains Tax to 50% for the rich, and to higher rates for everyone else. This is anathema to most Conservatives.
So let’s go back to first principles. Although Mr Hood was a common armed robber, I do understand his hero status. I have always said during this crisis we need to tax the rich more, to help us out of the financial chaos Labour gave us.
The best way to tax the rich more is to cut tax rates. If we put up CGT on enterprise, business and investment, it will deter talent, send people abroad, put off new people with businesses coming here, help rich accountants and lawyers with schemes to avoid it. It will change people’s attitude to financial risk, at a time when we need people to venture more, not less.
Last night a group of MPs and peers worked into the night on how we might come up with a solution to the political problem facing the Coalition. The first thing we all agreed was there is a big difference between longer term capital gains on investments, and short term gains made by speculators. We can see the case for a gain made in less than a year being taxed as income, to assist the Treasury purists and the Lib Dem Robin Hoods.
The second thing we agreed was the old CGT regime when the rate was higher included generous reliefs to avoid taxing inflationary and longer term gains to excess. If the new regime is to have no such Indexation relief, and a much smaller tax free amount, then it needs to recognise the difference between a longer term and shorter term gain.
We ended up with the following proposal. Tax gains under one year at a person’s marginal Income rate – this should be no more than 40% but is temporarily 50% thanks to Labour’s last penal phase.
Exempt all gains of over five years from CGT altogether. These are long term investments which are good for the UK. This would make us more tax competitive.
Tax two year gains at 30%, three year gains at 20% and four year gains at 10%.
Robin Hood has the scalp of the market speculator. The UK is a more attractive place for anyone wanting to create jobs, provide houses, make other worthwhile investments. Long term savers for their families and for a rainy day could sleep easy in their beds. It would raise more revenue than the 40-50% scheme currently being mooted, over any reasonable time scale.
May 18, 2010
Mr Redwood,
So it looks like the fix has gone in last night.Cameron could not be allowed to go round questioning the efficacy of investing unnecessary amounts in property :”… . there’s a very big difference between the capital gains that someone pays on a second home, which is not necessarily a splendid investment for the whole economy, and business assets” (The Prime Minister in City A.M. Monday).So bye bye investment in business ; hello the same old House Price Inflation.Disgraceful!You should be thoroughly ashamed of yourself for any part you played in this .
May 18, 2010
This sounds a good solution and similar to the proposal made by Lord Forsyth in his review of taxation which he completed for Mr Osborne a few years ago.
We already have had occupational pension funds decimated by Brown`s pensions tax. A blanket 50% CGT of the kind foreshadowed will kill risk investment by private shareholders. The UK already has a problem with banks that will not lend except on the most onerous terms. Measures that kill risk investment will also kill any prospect of the economic recovery on which the country depends if it is to cut the deficit and avoid banana country status.
May 18, 2010
This is a bit surprising. I can understand a committee arriving at such a Brownesque scheme but do you support it? Why is it better for an owner to hold a business for 6 years instead of 4? If its the right time for an owner to sell and recycle his capital and for a business to get a new owner and new direction, why should the state intervene and impose illiquidity? Anyone wanting to hold an asset for a year will instead hold for a year and a day etc. Accountants will be the winners.
Why not take the bull by the horns: the LibDems are right to say there is no logic in differential rates of CGT and income tax. There is no merit in encouraging entrepreneurs to sell businesses rather than hold them and take salaries and dividends, as generations of mittlestand owners in Germany have done. But 50% and even 40% are far too high as rates. They are uncompetitive and a deterrent to entrepreneurial activity. That’s the real issue.
May 18, 2010
John
Thank goodness someone in Parliament has some commonsense about CGT, as clearly anyone holding onto an investment for more than 5 years (in many cases more than 10years) is not a speculator to be hammered, but an investor to be encouraged.
Let us hope similar commomsense prevails with those who are actually going to make the rules.
Do not agree with your reasons about raising the threshold will cause problems for those on benefits and the low paid.
Raising the start of tax threshold to what will still be a very low start point is surely good news for everyone who works, or who receives a pension. The fact that it mucks up those on benefits is the fault of the Benefit system, not the Tax free allowance.
By raising the tax threshold we reduce some of the benefit trap, and surely encourage people to work, to be better off.
Given that the Benefits System needs a complete re-think, I am pleased that Frank Field looks like he will have the opportunity to put forward some ideas with Ian Duncan Smith. For too long the system has been overcomplicated, unfair on many, and far to generous for some.
May 18, 2010
As ever, entirely reasonable.
You are correct that increasing the lowest tax threshold to £10k will have less effect on the poor than some champions of the change would claim. However, it should also mean that a notable section at the bottom of the Tax Credit system would also become unnecessary, and deleting it is an efficiency saving.
Ideally I think that the whole Tax Credit system should be replaced with a simple tax code. Don't return money on request, simply don't take it in the first place.
The problem is as Robert K observed yesterday "Complexity allows the zealot to claim how much care and attention he has invested in coming up with a “just” system.". Mr Cameron and Mr Osborne needs to show that complexity is the antithesis of good Government.
May 18, 2010
I disagree with what you said and I think my disagreement will stand the test of time, whereas your policy is a temporary political decision. Specifically I think that the CGT on second homes distorts the markets, and pushes house prices up in an artifical way.
If we look at the fundemental needs of humans – shelter, warmth and safety come only second to food. By distorting the market on a fundamental need of humans politicians are making deeply disturbing decisions about how they treat their subjects.
May 18, 2010
When it comes to cutting tax to help the poorest, the government should bear in mind one of the principles from the old days of Parish Relief :- “No person in this parish on relief should get more from the parish than the lowest paid working person in the parish”.
The country must arrange its tax and benefits structure so that anyone working full time must be significantly better of than on benefits, otherwise there is absolutely no incentive for the low paid to work.
Perhaps benefits (except for the sick and genuinely disabled) should be frozen at the level when they were first claimed, thus ensuring that they reduce in value over time.
May 18, 2010
So liquidity will drop, and the cost of trading will increase
May 18, 2010
John,
Well worth working late into the night as I think you have come up with an excellent proposal that is both fair and workable. Your starting point of recognising the difference between long-term investment and short-term speculation is the way to go.
There will probably be quite a few MPs who will find it difficult to accept that if you want to increase the revenue from taxes you have to lower tax rates. Sounds counterintuitive but there are many good studies showing this is what happens.
If deficit reduction is the overriding aim, then maximising revenue from taxation should triumph over any other motives. Your proposal recognises the political reality of the Robin Hood factor but allows it to let off steam while preserving the means to maximise the revenue without damaging productive investment.
May 18, 2010
Robin Hood was a tax cutter, he fought against punitive taxes. Please don't reinforce the idea Robin Hood was a collectivist.
May 18, 2010
John, putting CGT back up to 40% on second and investment homes is absolutely the right thing to do. I would go further and whack 100% CGT on second homes.
Barely a week goes by without more news of the booming housing market, we are sinking deeper into the same mire which got us here in the first place. This must be stopped at all costs, unfortunately I think it will be allowed to rip just like before. CGT is at least a small step in the right direction.
I would concentrate my efforts on getting interest rates to where they should really be if prudence and saving are to be encouraged.
May 18, 2010
CGT is NOT the right vehicle to use to try to deflate the house price bubble. High CGT just discourages sales. The chance to sell in advance of the new high tax regime could create a sudden and dramatic fall in prices that triggers the next banking crisis, while causing landlords to serve notice on rental tenants, creating a housing problem. A house withdrawn by a landlord for sale is essentially removed from the housing stock until the sale is complete – a process that typically takes 5 months – longer if there is a glut of houses for sale. Once the new regime applied, suddenly there would be a dearth of houses for sale, with anything that had not sold taken off the market.
If you want to see house prices fall, then mortgages should remain rationed, and interest rates increased.
May 19, 2010
Thats why they should have introduced it with no notice. Agree with your last sentence.
May 20, 2010
If you really want to deal with the housing bubble, there's only one proper, effective and morally correct way to do it and that's the land value tax. Anything else will fail and/or create deadweight losses. Once that's in place, you can drastically reduce both income tax AND capital gains tax.
May 18, 2010
The worst case scenario being reported is 50% on all capital gains above £1000.
I would never have thought that a Tory government could ever have been linked to such rumours, and all because of the strawman created by incompetent government and wastrel consumers – the evil speculator.
Such a regressive tax move, no matter what clever exemptions such as excluding entrepreneurs or exempting longer term investments will have severe unforeseen consequences for investment, savings, and pension provision in this country.
I hope that there are still some vestiges of conservatism in the Tory party that will bite the bullet and make most of the required deficit savings by attacking Brown's waste and by pruning the government payroll. It will be painful, but is necessary if we want to encourage private enterprise once again. The CGT changes can only harm the private sector, drive money out of the stock market, and help prop up many more non-jobs in HMRC, and in accountants offices across the UK.
May 18, 2010
What about savings John?
Would this mean tax FREE savings ?
Mike
May 18, 2010
Sounds good to me JR. There will be some detail points to deal with. Things like share save schemes and regular savings investment schemes. That is, when will the five years be deemed to have commenced. What if you switch funds within an investment bond that is in a life insurance wrapper; or a roll-over bond? Will ISAs still be exempt etc, etc? Not forgetting your favourite JR, ETFs.
You will be aware that there is correlation between insurance based investment products and CGT.
May 18, 2010
Sounds fair to me.
May 18, 2010
This is a very sensible plan, which i would happily vote for, but I doubt it will be adopted as it doesn't address the second home problem.
May 18, 2010
My goodness. A sensible position on tax from a politician in government. For 13 years, I have despaired of any tax initiatives from government.
This seems an eminently pragmatic solution to the problem. If it appeared in the manner you describe, it would appear to tick both boxes: (1) we can't afford tax cuts; (2) tax cuts are vital to the recovery.
I am nothing if not a pragmatist, in conversation with friends I have been telling them that I would accept a rise in income tax; not happily, but I understand that the country is broke, on the promise that they were brought lower than they are now when the deficit is removed, and that the public sector was cut in proportion. I would also rather our MPs were honest, if a tax rise is on the cards: tell us now, tell us how much it will be and how long it will last.
If you want to sell a tax rise to people, you must tell us how it benefits us (just as you have with this post), even if that benefit is for the future. People understand investment (and I mean real investment not public sector "investment", that simply means "spending").
May 18, 2010
John, thats the first positive note sounded in weeks. Do wish they would include you in the Cabinet, these very inexperienced, commercially naieve young men make me very,very nervous.
May 18, 2010
You may have worked into the night with others to arrive at a reasonable solution to CGT but will it have any effect?
Our great leader has already proclaimed that second homes are not a good investment for the nation and there it lies. We will no doubt shortly be issued targets for grain and tractor production and receive a list of approved investments that conform to the States overall objectives for the economy.
Maybe we will even be obliged to wear smart boiler suits in order that we should be all seen as equal in the eye of the State.
Cameron is not showing a left wing aberration but a definite left wing preference to instruct us all on how to best live our lives, and we will see more of it as his tenure continues.
The right wing has not only hidden itself away but has been hidden away lest the outside world should see that slash and burn and the eating of live children still exists somewhere deep within the Conservative party.
I shall not worry however and I will contain my sorrow with the thought that I need not fear a late night call from the heavy squad intent on teaching a lesson to those citizens who chuck out two bin bags each week.
Ted Heath, Harold Wilson, John Major, Tony Blair; it's always been so. Telling us how to behave and what to invest in and how to do things whilst the country slowly but certainly goes to the dogs.
May 18, 2010
Hurrah for some common sense!
May 18, 2010
Would a similar mechanism, albeit on a shorter timescale, be useful in the financial markets, for professional traders not just ordinary people.
I have only a few shares in my small savings portfolio but following their value it's long been clear that with the advent of on demand trading, and nowadays automated computer driven 'hair trigger' instant trades, shares are becoming more and more volatile. The US market demonstrated this last week!
I suggest shares have become a short term gamble and as such increasingly removed from their real purpose – which was to provide finance for commerce and industry and provide an investment for savers.
May 18, 2010
I expect you'll do a post on it, but the inflation figures are worse than I feared.
RPI month-on-month is 12.0% annualised, 10.3% over the past 2 months and 9.3% over the past quarter.
Even the understated CPI shows month-on-month at 7.7% annualised, 7.1% over 2 months, and 6.6% over the past quarter.
The disconnect between RPI and CPI is also fast becoming an issue: it seems to be increasing rapidly.
May 18, 2010
This doesn't effect me so it would be easy to not bother about it but private property is one of the basic tenets of conservatism. To have such an avaricious attack on private property launched within the first week doesn't augur well.
I'm glad you and others are working to try and limit the damage going down such a road would lead to.
May 18, 2010
What you propose seems logical and fair. I wish you were at the treasury.
Prosperity will be produced by a vibrant private sector, so this sector should be nurtured, the UK should be the place set up business. The taxation system should aim to help bring this about.
As for second homes, many people are on money purchase schemes that rely on stock market performance. The FTSE reached 5600 in December 1995 some 15 years later it’s about 5200 and looking a bit wobbly ( In other words its gone sideways for years). These people, representing an increasing proportion of the private sector have no index linked net to fall back on.
It’s natural that some people invested some of their retirement money into property. To penalise them at the 40% or 50% rate would be unfair in my view.
I believe Nigel Lawson made a mistake when he put CGT to top rate one of the few good things that Gordon Brown did as chancellor was to reduce this tax.
May 18, 2010
Incisive thinking self-evidently as beneficial as laser surgery.
May 18, 2010
In the DNA of the original liberals was "the belief that society and the economy work better if you allow people to be successful and to pay their own bills". Indeed that was much of the essence of liberalism & much less so that of the early Conservatives. Digging out a few reminders from history might help them.
The tax simplification you are talking about is sort of moving towards a flat tax of which Friedman said "Although there is agreement between left & right that lower taxes, fewer loopholes & a reduction in the double taxation of corporate income would be desirable, such a reform cannot be enacted through the legislative process. The left feel that if they accepted lower rates & less graduation in return for eliminating loopholes new loopholes would soon emerge – and they are right. The right fear that if they accepted the elimination of loopholes in return for lower taxes & less graduation, steeper graduation would soon emerge – and they are right". He proposed falt tax as a Constitutional amendment but in any case there is the basis for agreement there if both sides recognise the other's legitimate fears.
Mr Hood may, if he existed, have been a armed robber but the stories suggest he robbed mainly sherriffs, aristocrats & the wealthy clergy – all part of the state parasite structure – rather than honest entrepreneurs.
May 18, 2010
We need to differentiate between productive investment with risk and risk free capital return. Someone investing in a business is taking a risk, someone with a Buy to Let is not, they simply ride on the back of restricted planning laws and social spending.
Lower taxes the higher the risk.
May 18, 2010
I work for a company engaged the risky business of commodities trading in the City of London. The company is wholly owned by its employees (about 300 shareholders) and has long operated a deferred share scheme. I am not hugely well paid and my wife doesn't earn anything for her voluntary work at our local state school and community. In my case, I have earmarked my company's shares for my three childrens' (hopefully) tertiary education (my eldest is doing AS levels just now); so you can see the sort of value of the shares involved in my case. This is quite risky for the children since my company's shares could become worthless if it goes bust, but then if the worst comes to the worst they will have the student loan scheme to fall back on.
According to the latest speculation, my children and I are about to be hit by a double whammy of CGT at 40% or 50% and much higher university and college tuition fees.
How fair is that?
May 18, 2010
Robin Hood fought against high taxation that took money out of the pockets of those that worked hard.
Raising tax rates is the role of Prince John!!
May 18, 2010
This Camerclegg coalition is a poisonous sham that should be disbanded asap. Who voted for five-year fixed term Parliaments with a 55% ring-fence for the party or parties in power? Who knew that the first thing Cleggercon would do was to increase capital gains tax from 18% to 50%? For heaven’s sake it was GORDON BROWN WHO CUT CGT TO 18%! What more monstrous imposition on an enterprise economy can there be than the state helping itself to half of the capital gain created by entrepreneurs and investors? Why bother to invest at all if the state loots the proceeds?
Why cannot common sense prevail? What is it about government that simple, logical arguments as outlined here by JR get no airtime? How can Alistair Darling still be talking (The World at One, yesterday) in terms of the need not to make cuts in public spending yet because it would damage the economy? Why does George Osborne have to use Nu-Lab speak about "protecting frontline services"? What are these services and why should they be protected?
Here are some answers. The state does not create wealth. It takes money coercively from those who earned it. It does so on the moral principle that it is supporting the less well off. But it entirely ignores another moral principle – that it is violating the property rights of the person who earned the money in the first place. By spending an ever increasing proportion of national income, 13 years of Labour has put us in a vicious economic tailspin from which only radical reform can save us. That reform should include at least: exit from the EU, a smaller state, smaller taxes, more individual liberty and with it responsibility.
What hope of that from Cammerclegg? None.
May 18, 2010
The UK is absolutely a terrible place to save at the moment. Inflation has once again 'suprised' on the upside. And, once again, Meryvn King and Co. refuse to do anything about it. I now have far more savings in Singapore Dollars than I do Sterling. Savers are being asked to pay for the overborrowing of others.
May 18, 2010
"Mr Hood was a common armed robber…". Well, I never saw him that way. The composite legend of Mr Hood has been distorted by Hollywood and others. Mr H did not 'rob the rich to give to the poor'. Mr H challenged the coercive and totalitarian state in the shape of the Sherrif of Nottingham. He also challenged the oligarchical industrial and commercial monopoly of his day, the Church. He is alledged to have robbed merchants, in reading more about him it seesm that he did not rob tradesmen or honest businessmen. He also supported Faith and Family, these are represented by Friar Tuck and his own sense of family and his wooing of Maid Marion. IMHO RH was one of the first Libertarians seeking freedom under the rule of legitimate law to live as you please with due respoect for others and without being subject to the arbitrary violence and taxation by the state and the rent seeking landowners and oligarchical Big Corporation (the Church) of his day.
These composite legends, like those of Arthur, grow up in the telling by men down the ages. Man (yes yes and women) know what actually works and they also know that the powerful seek to exploit everyone else. The RH legend seems to me to indicate precisely the problem that faces us today. Excessive government with excessive power and excessive taxation to support it and it the government in alignment with the oligarchs, in our case for example the banks.
Other than that, great post and, if you are set on keeping CGT (with which I do not agree) I generally agree with it.
May 18, 2010
John
Thank you for your efforts over this. My despair when I first read the proposals was due mainly to three factors:
1. An abuse is occurring – income is being artificially converted into gains and in addition the lower business rate (at one time 10%) was available for use by equity and hedge fund managers for what other people would consider “trading” activities and hence income. (Apples = income; apple trees/orchards = capital; trading in orchards = income). The current proposals are a blunt instrument not targeted at the “wise guys” but taking in people who have never engaged in income to gains washing. These types of people might only ever have a handful of chargeable gains in a lifetime – infrequent but often of sufficient size when added to their income to take them into a 50% tax rate.
2. The sheer unreasonableness in taking an existing 18% rate and increasing it to 40% or 50% when people holding assets long term had planned their affairs for the last 13 years on the basis of the lower rate and the now abolished taper relief. It has an element of retrospectiveness worthy of Brown (retroactive to him).
3. A 50% capital tax rate is bordering on the confiscation of private property – the realm of Marxists and not Conservatives.
I have one further suggestion to put to you. The deficit needs to be eliminated and an increased tax take has to play a part. The currently CGT allowance is £10,000 – the “wise guys” will generate gains each year to take advantage of this. There are proposals to severely reduce it. This allowance could be decreased toward what the Lib Dems want – say £5,000, but, make any unused allowance available for carry forward for ten years at least – applied retrospectively.
This would be of no use for those who have being generate gains and using their allowance to the maximum on an annual basis, but would be available for the “one-off” gain taxpayer. It could allow you to concede slightly higher rates than those you suggest – until this crises is over.
(Sorry for the length and thanks again for the efforts you are putting into this. If it were to go ahead on the current 50% basis I am sure it will do far more long term damage, to the economy and reputation of the Conservative Party, than is currently imagined – Brown nicked your pension; Cameron nicked what was left.)
May 18, 2010
Yes, it must be right to distinguish between short-term gains (not least to protect income tax) and long-term gains from investment of capital. Whenever a tax is levied at a high rate and then massive discriminatory exemptions are introduced to forestall the economic damage (as in inheritance tax or the pre-1984 corporation tax) one can be certain that it is a bad tax.
On detail:
1) I suggest that your schedule works better if the first 24 months are counted as short-term (making it add up to five);
2) There needs to be a reasonable tax-free allowance or there will be undue administrative costs to the HMRC and widespread petty evasion. It would be neat to align the CGT threshold with the income tax allowance, meaning a cut now but a rise over five years; and
3) There should in principle be some long-term rate (10 per cent), since a zero rate collects zero tax, but this would need to allow for inflation. It would be wonderful if the Bank of England had stuck to keeping the inflation rate near to 2 per cent, so that a simple 2 per cent cost escalator could be applied (but that is another story). So in practice your formula makes sense.
May 18, 2010
Speculation/investment – sounds like your dancing on the top of a needle.
I'm surprised you've come up with suc a tricksy settlement worthy of our dear departed prime minister.
Why not back to the genetic principles of Adam Smith with one or two amendments such as "you can't buck the market".
May 18, 2010
Just an idle thought – what would be the effect of removing or restricting the CGT exemption from your only or main private residence instead? It might stop the ridiculous excesses of the housing market. MIRAS was scrapped.. why not this?
May 18, 2010
It would mean no-one would sell their family home, because it would crystallise a tax liability that made their next home unaffordable.
The way to stop the ridiculous excesses of the housing market is to ration mortgages rather than handing them out like sweets, and ensure that savers who provide the money to lend to borrowers get a decent return (and that therefore mortgages pay real positive interest rates).
May 18, 2010
In total agreement Mr Redwood, a good comprimise. Has this yet been relayed to the Treasury team and if so, what was the response?
May 18, 2010
What about a VAT increase to say 20%?
I’ve never understood why VAT is unpopular. It taxes the rich more than the poor as they spend more disposable income on luxury goods; it’s not a tax which is easily avoidable by clever/devious accounting methods (cf. income tax for rich people); it’s easily implemented.
As long as the exemptions which currently exist are not altered I think an increase in VAT would be a fairer way of spreading the pain. Of course it adds to the rate of inflation so perhaps that’s why it’s unpopular with politicians. Perhaps such a rise in VAT is in the pipeline anyway and we are being softened up by a rise in CGT first.
May 18, 2010
Socialists use taxation as a way to punish people who dare to be financially successful, rather than a way to raise revenue.
Maggie already demonstrated that lower tax rates results in higher income levels for the treasury. You don't need to punish high earners, you should encourage them.
I'm glad to see the new government are reviewing Labours spending plans and have already started cutting the waste.
May 18, 2010
A very sensible proposal.
Osborne's CGT seems to favour business over private investors. One can see the case for the government trying to give potential employers a helping hand, but to poke a pencil in the eye of the responsible private investor, is asking for trouble.
The middle classes, largely responsible people, who do not rely on the government for their sustenance, have been shabbily treated in the past 13 years.
New Labour actively encouraged them to put all kinds of things into their SIPS, including 2nd homes. Then it pulled the rug from under them, imposing all kinds of taxes and regulations.
For the Tories to increase the burden on already put upon investors would be suicidal. The middle classes backed Cameron to a degree, in the GE, but should Osborne push ahead with this CGT measure, he'll find few friends.
He absolutely HAS to re-negotiate this issue with the Lib Dems.
May 18, 2010
No John. The Tax cut will help me as a do not claim any benfits and I am on a modest retirement income. If it removes this crazy complicated tax credit system so much the better.
May 18, 2010
Well proposed Mr Redwood. Sadly the politics of headline and of ideology grip many politicians. If the leaked proposals of increasing CGT become fact, I will resign from the Conservative Party.
My savings yield 0.75% because I subsidise the bank bailout. The stockmarket/pension funds have yielded a negative return for decade past, thanks to Brown.
UK is fast becoming No Country for the Prudent Saver.
May 18, 2010
You're too good for any party, Savonarola.
I find most modern British politicians (our host excepted) to be completely interchangeable – hence the speediness of the formation of the coalition and the ease of dropping so many principles for expedience.
The parties are merely vehicles for PPE graduates to make a career in Parliament.
The right wing of the Tory party should break away.
May 18, 2010
What sound reasoning, but will the Con-Lib (or more like Lib-Con) coalition come up with something so reasonable? It would be interesting to know who was in your group of MPs & peers.
I strongly believe that ANY (and I emphasise that word strongly) tax changes made by Government should be to encourage people to do the right thing. They should also be done with a view to the long-term and not the next day's headlines in the newspapers.
Surely it is right to encourage people to save for their future, which is why the Pension Credit fails. And what right is it of the State to be allowed to confiscate 40% of a person's estate when they die?
One must get away from the politics of envy. Drive all the wealth creators out of the country and we will be a lot poorer.
It is good to read some Conservative views. Thank you.
May 18, 2010
What is the chance of the chancellor bringing in retrospective CGT backdated to beginning of this financial year? Surely that would be outrageous and good ground for an 'umble grassroots member to resign from the Conservative Party?
May 18, 2010
John, you are wrong. I pay myself about £10k from my own business which is all I can afford. (I am a professional engineer, masters, 30 years experience, tested in top 1% for maths; so I expect low pay – this is sarcasm btw). The proposed increase in the tax free allowance would be welcome even (especially) if it gets rid of working tax credit, and I got no extra money.
May 18, 2010
I agree with Nick!
I'm self-employed, my mother is a widow on a pension and the change to tax allowance will make a difference to both of us. I have never wanted to live off the state, and have resolutely kept away from the benefits system, though I could probably have claimed something. I prefer to live on my own means, and the increase in the tax allowance is important to me.
John – On CGT, it should be remembered that not everyone who lets a house did it by choice. My first house became unsaleable through negative equity after the last recession (a combination of the recession and problems in the area), but I had to move. So I let my house to cover the mortgage, making a small profit which covered my costs most of the time, though lately not so well. Now the area has regenerated and the price of the house has recovered, I am in the process of selling. I've had the house for over 10 years, I was never in it for the money and sometimes struggled with costs. So I welcome your ideas on CGT – I have scrimped and saved to deal with my problem, and I suspect there will be many more people in the same position after this recession.
May 18, 2010
Quite agree.
Flat rate of 40 or 50% with a low threshold will yield little extra tax because vendors will go on strike.
In addition if there is a delay in implementing new higher rates there is a risk of asset value collapse in the rush to sell. Not good news when the taxpayer owns a large share of our banks.
May 18, 2010
At last! Some sensible input instead of the Brooding Genius dictating his Ideas. Well done!
And one other thing – don't forget that, the more complicated the tax, the more bureaucrats are needed to administer and collect it and deal with complaints and check that the right amount is given and then given back in the case of benefits.
I do hope that the tax system will get a lot more simple for that reason: at the moment, it is so complex that lots of unnecessary people are employed to run a very inefficient system – and that means the bucket must have lots and lots of holes in it – again like Greece.
May 18, 2010
Well great. Sounds like the best of both worlds.
Is this to now be coalition policy though? Or is it just a few people having a chat?
May 18, 2010
What you propose seems logical and fair, pity you aren’t at the treasury.
Prosperity will be produced by a vibrant private sector, so this sector should be nurtured; the UK should be seen as the place to set up in business. The taxation system should aim to help bring this about.
As for second homes, many people are on money purchase schemes that rely on stock market performance. The FTSE reached 5600 in December 1995 some 15 years later it’s about 5200 and looking a bit wobbly (In other words it’s gone sideways for years). These people, representing an increasing proportion of the private sector have no index linked net to fall back on.
It’s natural that many people invested some of their retirement money into property, to penalise them at the 40% or 50% rate would be wrong in my view.
I believe Nigel Lawson made a mistake when he put CGT to top rate one of the few good things that Gordon Brown did as chancellor was to reduce this tax.
May 18, 2010
Tax need not be a dirty word either, if only the money were better spent. I'd be happy not to be able to afford a car (as it happens I can't under this system anyway) if public transport were better and the police and courts made it safe to travel on.
The Major Government told us that we wanted 'choice'.
No we didn't. We just wanted things to work.
May 18, 2010
I am very relieved to see some common sense at last and hope that these talks become policy. I have supported the Conservative party lifelong including work (many years ago) as a Young Conservative. The party I now see in government appears more left wing than “old labour” and I find it difficult to recognise. A punitive rise in CGT would seriously affect my finances and any “aspirations” that I may have had to make progress in life will be buried along with my previous political allegiance.
May 18, 2010
John, this sounds fair, sensible & understandable.
It makes sense to favour long term investment over short term gain(with the incentive to take excessive risk through leverage) which often appears to be little more than tax efficient gambling.
If the tax can be seen as a "successful tax" it stands far more chance of being long lasting.
As an investor(albeit comparatively small) it is very off putting to constantly have new and changing taxes and regulations to deal with.
I am sure that the businesses that investors choose to put their savings with are also fed up with having the goal posts regularly moved (usually successful co's which is doubly annoying) re tax, not just in the UK but overseas.(Oil co's, banks, mining, Pharma's to name a few).
If it can be shown that the UK tax authorities are going to have fair taxes, that will not change for the term of the parliament, it will have a major positive impact on investment in the UK.
May 19, 2010
Well done John sounds fair and reasonable to me.
May 19, 2010
Would it be possible for you to enable an online petition?
Members of the public could show their agreement/or not for your proposal of a sliding scale of CGT depending on how long the asset has been held?
A petition to the coalition government especially if it this can be done online, is a very quick way of galvanising people into action. I for one think you have a good idea in principal as it would encourage new investors to hold on to their assets for a longer period and benefit those investors who are not speculators. The economy would then benefit from a gentle increase in CGT for long term investors whilst yielding higher tax from speculators.
Reply: Too busy to do that, but you could initiate a Downing Street one
May 19, 2010
I entirely agree with John's proposal. This is similar to the "business asset taper relief" system that was in place before Labour scrapped it and set CGT at 18%. The previous system excluded second homes and the like form the relief but provided a vehicle to encourage value creation in our economy and fair recognition for this for all involved. Although the current level of CGT includes entrepreneurs relief, this only applies to those involved in a business who own more than 5% of the equity and exert control over the enterprise.
This would exclude many individuals who make very significant contributions to the growth of new businesses exchanging good salaries and perks for the risk and potential reward of a small share in the value they create.
What can we do to ensure that the widely reported "generous entrepreneurs relief" works for all entrepreneurs who work hard and take big risks to create new businesses, most of who do not own more than 5% of the businesses they are creating and so do not qualify under the currently defined entrepreneurs relief!
May 19, 2010
Your suggestion wouldn’t achieve those things you are looking for.
It did make me laugh that your suggested CGT solution was broadly the same as what Mr Brown introduced 13 years ago ……. surely this, alone, should give you pause to recondsider whether your suggestion is sensibl?
There seem to be four broad types of investment by individuals which should be encouraged:
– by entrepreneurs starting a business
– by potential investors (business angels and the like) investing in businesses
– by individuals wanting to save for their retirement
– investment in charity/social enterprise
I don’t believe it as simple as categorising things as short vs long term. In any event long term in one industry may mean 12 months in others it may mean 12 years, so you can’t easily define it. I believe the better approach is to incentivise people to carry out the specific types of investment which are desirable rather than to incentivise them for simply holding assets for longer.
As an aside, I also think you misunderstand the motivation of entrepreneurs: the level of CGT is a long way away from most people’s minds when they start a businesses. In 10 years of advising start up businesses not once has a client asked me what his tax bill will be if he starts his business and sells it for £10million quid in five year’s time.
Brown did introduce something along the lines of what you are describing early on in his chancellorship. No doubt this did encourage some desirable investment but the disparity between the CGT level if assets were held for 2 years (10%) and income tax meant that masses of masses of tax planning took place to switch income into capital gains (remember all the fuss about employees of private equity firms only paying 10% tax?). Frankly this was great news for me and the other armies of lawyers and accountants who got paid plenty to devise and implement all these schemes but I don’t think this is the kind of investment that you are Gord or the country is after?
So the better way is to incentivise the specific investment types. This is roughly what the current system does through the various reliefs:
– entrepreneur’s relief for entrepreneurs
– EIS relief for private investors and also ability to invest in these businesses through venture capital trusts
– ability to make investments through pension funds (people are increasingly doing this through their self invested pension funds, these aren’t just for the very rich)
– community interest companies are starting to be used as a way to invest in social enterprise and some specific encouragement to attract investments in these entities would be good.
All of these reliefs could be simplified, expanded, improved and PUBLICISED (pretty telling that you didn’t even mention them) but, broadly, they are the way to encourage targeted investment of the sort we need and are well used.
It is plainly barmy to have a basic CGT rate at 18% and everyone who advises in this area has been expecting it to change ever since it was introduced. My particular bugbear is that it encourages buy to let investors, something we should be discouraging for their good and the good of the wider economy.
Above all what we need is consistency on this whatever route is taken. Lack of consistency and the unpredictability of tax CGT and other rates has caused major issues and discourages investment.
May 19, 2010
Dear Sir,
Here is the content of a pre-election piece I tendered to Interactive Investor.
'All; There is a central lesion in the glib Lib-Dem CGT proposal to level tax take. It is this; income is certain ( no-risk to capital ) but investments require the acceptance of possible loss of capital ( up to 100% ). This is particularly true of AIM stocks where it is a sine-qua-non that we are in a very risky business. How many would invest in AIM if the marginal rate of tax on gains was 50%? The AIM market will be hammered to pieces.
A requirement for investment is that it requires a long view. This brings in an equally important observation. There is an implicit contract with the Gov't in investing in risky assets; 'You take risks with your capital NOW and we will recognise this with a specified tax take on any FUTURE gains'. This was originally 10% on AIM but 'Broon-Liar's Darling' step-changed this to 18% – an 80% increase with no remark that the contract had been broken. Now the Lib-Dems are intent on multiplying even this by 200% – 300%. If these dumbos were to stipulate that gains on AIM stocks after some FUTURE date would be taxed at these high marginal rates PIs would at least have some option in deciding whether they wanted to exit from the contract by selling. Fat chance. And they wonder why every sector of British society has had it with these and the other political chumps up to the back teeth. Integrity – Nul points. Competence – Nul points.'
My apologies for the strident tone of the above but my pension was with Equitable Life and it is possible that a 10 year high-risk investment will come good just in time for the 50% rate!! The core of my thesis is that the CGT proposal may not be just and will be self-defeating. Your thoughts are very reasonable and I hope that something of this nature is adopted. I know a number of high net worth individuals ( self-made individuals ) who are at the end of their tethers with this attack on risk taking having suffered 13 years of Mr Brown et al. It is unconscionable that an even worse proposal seems to be being discussed.
May 19, 2010
The real issue which needs to be solved is the double taxation of corporate profits. Gains on shareholdings are fundamentally different from gains on assets held directly like second homes, because the value of the former already includes a hefty deduction for corporate taxes on profits (past, present and future.) With an 18% CGT rate this double taxation is bad but not utterly destructive. But if you combine 28% corporate tax and 40% or 50% CGT, you've just made owning shares outside an ISA completely pointless. With no indexation either, you're getting real tax rates well over 100%.
So you have to be kinder to shares than to directly held assets which don't have the double taxation problem. My suggestion for shares would be to treat all receipts from shareholdings as first a return of investment (but increased with the RPI) and then a dividend. Dividend taxation does at least recognise the double taxation problem, albeit inadequately. Ideally you'd treat all your shares as a single pot, and not have separate gains and losses on each shareholding.
You'd still have to have additional relief for owner managed businesses and start ups, because corporate tax and dividend tax together still amount to 50% or so which is way too high for owner managers.
May 20, 2010
Why do people find CGT so difficult?
(1) Inflation must be taken into account so that it is real gains that are taxed. After all, it is government – or a government mandated organisation – that creates the inflation.
(2) Capital losses should be offset against capital gains. If a person gains £10000 on one transaction and loses £8000, CGT should be payable on £2000. And if a person makes a net loss on capital transactions, the loss should be offset against earned income.
After those two principles of natural justice are applied, it will be found the CGT is not a big revenue earner, whatever the rate.
May 20, 2010
My only observation is that property must not be considered an investment. We have laws in this country that prevent people from buying a piece of land and building a shelter on it.
We have had a truly epic house price boom under Labour and older generations are sitting on mountains of unearned wealth they call equity. When the equity is materialised by them selling their house, the money is provided by young people below them in property chains borrowing small fortunes to pass up the chain to them.
It is not fair and definitely not equitable. Also, high house prices are a blight on our economy. Think how much better off we'd all be if houses were half the price they are now – everyone would have much smaller mortgages and a lot more disposable income to spend and create demand in the economy.
I'd like to see swingeing capital gains tax on second (and subsequent) homes to discourage the new generation of Buy to Let landlords who think it is their God given right to 'own' 50 properties – depriving 50 people of the ability to buy just one property. There is a finite supply of property – it is not right that people can leverage the equity in their own homes to deprive others of the opportunity to buy.
Of course, one day our young people will wake up and the Poll Tax riots will seem like a vicarage tea party compared to what will happen when they realise they are going to be renting serfs all their lives.
May 20, 2010
What a load of utter rubbish.
What makes an investment productive or speculative isn't primarily about the term of the investment, it's about whether the investment adds value to the economy, or just removes an existing asset from the market.
CGT at 0% on the productive investment of capital: OK then.
CGT at 0% on the speculative hoarding of life's essentials: NO.
For example; the hoarding of residential property, in the hope of the resultant shortage driving up prices, is exactly the same as the hoarding of corn for the same reasons. It would appear that the New Whigs get this, wheras you just have some speculative investment you want to unload.
May 20, 2010
Spot on Timm. You got across what I was trying to say far more effectively!
May 20, 2010
I completely agree with the comments from Mike Wilson and Timm above.
People should not be able to speculate on property free of tax – even if holding onto it for 5 years. This is still speculation and reduces the supply of housing and ability of families to own a home.
Why should I work my backside off day in and day out and pay 40% on my income when people can speculate in this way by sitting on their backside, adding nothing to our economy and pay less or no tax?
Genuine entrepreneurship – well that's a different matter.
In my opinion the focus at the present time should be on taking the lowest paid out of tax as it seems the Government is trying to do. Make it worthwhile for people to work and at the same time clamp down on benefits. Carrott and stick.
May 22, 2010
1) Interest should not be fully tax deductible for 2nd homes.
2) Stamp duty should be a straight %, but much lower and paid irrespective of the tax avoiding vehicle owning the property.The vehicle should be 'looked through'.
3) A general anti avoidance principal should be adopted with taxes lowered as the level of income rises.
4)We should remove the 'planning gain imposed on first time buyers' and force land banks to be used or sold off to smaller developers.
5) All residents who work in the UK should pay the same taxes.
6) CGT should = the highest marginal income rate- otherwise the tax lawyers will win.
Printing money should not return.
Why hasn't the number of MP's not been immediately reduced by 10% with another 20% or more to follow?
Why hasn't the generous pension schemes of MP's,Seniors and others similar not been scrapped.