The front page of last Thursday’s Financial Times made interesting reading.
It said the review by the Office of Tax Simplification requested by Rishi Sunak in July this year had been published. It proposed that the tax rates on Capital Gains Tax be aligned to Income Tax and the Annual Exempt Amount reduced from £12,300 to £2,000 or £4,000
Immediately colleagues close to Sunak began distancing themselves from the report with one being quoted in the Financial Times as saying, ‘it’s the job of the [Office of Tax Simplification] to review these taxes, but essentially these are a bunch of wonks doing this work’!!!
The article made it clear that Sunak needs to ‘tread carefully because any far-reaching reforms of CGT would hit core Tory voters’
Let’s take Terry, a client of mine. He was a trader in his twenties and made a substantial sum of money in the 1990’s which he invested in buy to let property. He is now married with two young kids and works as a web developer in London (not his real name or family circumstances).
He loves what he does, but he can do it anywhere and does not need to be based in London – or indeed the UK. He has seen the tax on his buy to let portfolio increase year on year and now the threat of increasing the CGT rate from 18%/28% to 45% had made him think
If these changes were introduced, Terry tells me he would never vote Conservative again and would move to Portugal (listen to last week’s podcast with Carlos Santos of Dixcart on the benefits of living in Portugal). He would then sell all his buy to let portfolio and the UK HMRC would get nothing.
It is not surprising that the Office of Tax Simplification has recommended these changes. As Noel Craven Investment Director of Quartet says in this week’s podcast only 281,000 paid CGT in 2017-18. This raised only £8.3 billion in revenue compared to £180 billions in income tax. If the Annual Exempt Amount is severely cut back, the number of people who would pay CGT would rocket and would include people like Agnes. Agnes, like 50,000 others annually report capital gains just below the £12,300 threshold
Agnes is elderly. She lives near Windsor and supplements her meagre pension by taking just under £12,300 capital from her portfolio of shares which her late husband had saved during his lifetime out of taxed income. She is not rich and lives modestly.
Agnes like Terry is a traditional Conservative voter, but unlike Terry cannot make a new life for herself abroad, so would be forced to make greater inroads into her portfolio to maintain her lifestyle. She has also sworn to vote Labour at the next election – if the Office of Tax Simplification recommendations are implemented.
It is a popular opinion that the rich should fill the shortfall created by the pandemic but raising the rates of CGT and slashing the Annual Exempt Amount but people like Agnes are not rich and the changes will barely make a difference
At best raising the rate of CGT will bring in £14 billion. But even the OTS admits this is an overestimate since in practice the amount raised would be less as people would change their behaviour.
Most gains are made by relatively few taxpayers; 62% of CGT is raised from gains in excess of £1m which is only 3% of the 281,000 who paid any CGT in 2017/18.
These people often have the flexibility about when to dispose of assets – Terry for example, would not sell any of his buy to let properties until he was no longer tax resident in the UK – in which case UK HMRC would get nothing
Furthermore, the revenue raised from CGT even if they increased the rate is miniscule when compared to the enormity of the problem. The national debt is set to be £2trillion, 100% of annual GDP. £8.3 billion even if increased by a further £14 billion is but a drop in the ocean.
There are only two ways to tackle the deficit in my opinion; the first is to catch tax cheats – which HMRC is well on its way to being able to do – listen to Andrew McKenna’s podcast – and about which I have written much upon, and the second is to increase the incentives on businesses to grow, make more money - which can be taxed, and employ more staff who will pay income tax.
In short, the only people who are going to make any difference are the wealth creators; either those who have tried to cheat by no paying their taxes (or HMRC would like to argue they were cheats) and wealth creators who do not cheat.
Episode 35 -
Winner of the PAM Cautious Award, Noel Craven: Quartet
In Episode 35, Caroline Garnham speaks with Noel Craven, an Investment Director at Quartet Investment Managers. Noel has over 20 years of Investment Management experience for High Net Worth International clients. Caroline and Noel talk about what it means to be winners of the the Private Asset Managers (PAM) Awards in the category "Investment Performance – Cautious Portfolios” award. They further discuss the proposed increase of the Capital Gains Tax and what it could mean for investors.
At a difficult time like this when so much rests on the success of our wealth creators to pull the world out of the mess it has found itself in – we as Private Client Professionals need to pull together to serve our clients as best we can, by being better informed as to what each of us does for our clients
This is what Caroline’s Club sets out to achieve. It also makes networking more effective and efficient by decoupling it from education. You do not need to listen to speeches to meet other Private Client Professionals. All you need to do is to share Client Stories in matched zoom meetings
If you would like to serve your clients better and network more effectively and efficiently join Caroline’s Club, simply register and join our Client Stories Zoom meetings here.