Taxing the rich post lockdown is now the most consensual proposition in politics. Surveys for Rainer Zitelman’s recent book ‘The Rich in Public Opinion’ found that large majorities in the US, UK, France and Germany backed ‘substantially’ higher taxes for millionaires.
It is hardly surprising therefore that the Office of Tax Simplification, an independent arm of the Treasury, has been asked to identify opportunities to ‘simplify’ capital gains tax in relation to individuals and small businesses.
The word ‘simplify’ is a euphemism for ‘raise’ taxes from capital gains tax, but how will this affect the backbone of our economy – our entrepreneurs?...
Bear with me as I explain how the existing system works and how it is now likely to be changed.
Income tax allows an individual £12,500 the ‘annual exempt amount’ before paying any tax. Income in excess of this up to £50,000 more is then taxed at 20% ‘basic’ rate. If taxable income exceeds £50,000 the ‘higher’ rate goes up to 40% on the excess, and any taxable income above £150,000 an ‘additional’ rate of 45% is charged on the excess.
If during the year a capital gain is made such as on a sale – or a gift - of a capital asset, such as an investment or property, (other than your main residential home) – and a gain is made i.e. the value of the asset when disposed of is higher than what it was when acquired – this gain is chargeable to capital gains tax to the extent it exceeds an annual deduction of £12,300.
The chargeable gain is then added to the taxable income for the year to find out what ‘tax bracket’ the gain is in. There are two brackets – 10% if the taxable income and chargeable gain does not exceed £50,000 and then any gain when added to income exceeds this is charged at 20%. (Residential properties are charged at 18% and 28% other than your main home)
So, if you have income of £32,500 (first take off the annual relief of £12,500 and other exemptions). The taxable income for the year is £20,000. If during this year a gain is made of £212,300. The gain element is taxed by first taking off the £12,300 annual exemption. The next £30,000 of the capital gain is taxed at the ‘basic rate’ bracket at 10%, leaving £170,000 to be taxed at 20%.
As can be seen the rates of capital gains tax are currently much lower than for income tax.
Given the current trend of thinking post lockdown – the most likely outcome of the ‘simplification’ review is that capital gains rates will be realigned to follow the income tax rates which could mean the abolition of the capital gains tax exempt amount of £12,300.
The abolition of the annual exempt gain will however hit the elderly who have retired and are living off their savings, taking profits on good performing stocks to supplement their meagre dividends given low interest rates and poor business performance post lockdown. Most of these people do not pay capital gains tax because their gains do not exceed £12,300. These people could hardly be called rich!!!
The other aspect to factor in is that as the rate is increased so the churn of capital assets will go down and the amount of gains realised will diminish. This will affect the businesses which buy and sell passion investments and the fund managers of listed company stocks and shares
The third area of concern is the entrepreneur which we covered last week. Traditionally, the rationale for taxing capital gains less aggressively than income is to encourage the entrepreneur to take risks; to re-invest in the business or to hold onto the business for longer to get a higher gain taxed at a lower rate of tax.
Our entrepreneurs are the backbone of this country’s economy and collectively they are the country’s biggest employers. Many of these entrepreneurs have already been hard hit by lockdown and without the incentive of lower rates of tax – could just throw in the towel.
For this reason, I think there is justification for introducing a higher tax rate for gains above £150,000 but not at 45%, or if it is to be that high to reinstate the entrepreneur’s relief at £10million.
Last year the Government slashed entrepreneur’s relief from £10 million to £1million and renamed it ‘Business Asset Disposal Relief’. This relief is a lifetime relief, so for the serial entrepreneur who has already made £10million of gain on his own business there is no further relief. But this relief was well targeted and for many the jewel in the crown worth fighting for.
I have no concern with ‘simplifying’ capital gains, but to be well received it needs to target the rich not the elderly or the entrepreneur.
My podcast professional of the week is Nick Harvey Chief Executive of Highstead Partners which specialises in corporate finance. Their aim is to nurture the entrepreneurs behind the businesses throughout the lifecycle of a business – I asked him for his opinion on how a forthcoming recession and change in capital gains tax could affect his clients, in his opinion raising revenue from capital gains tax is just a pimple on the backside of the elephant of debt, and no entrepreneur should try to take profits ahead of a tax raise – the business growth is the only factor to focus on.
Click here to listen to the new podcast
Episode 32 -
Doing Deals, Nick Harvey: Highstead Partners
In Episode 32, Caroline Garnham talks to Nick Harvey, Executive Chairman of Highstead Partners, which specialises in corporate finance. Their aim is to nurture the entrepreneurs behind the businesses throughout the lifecycle of a business – Caroline asks Nick for his opinion on how a forthcoming recession and change in capital gains tax could affect his clients, in his opinion raising revenue from capital gains tax is just a pimple on the backside of the elephant of debt, and no entrepreneur should try to take profits ahead of a tax raise – the business growth is the only factor to focus on.