What caught my eye this week.
This week we’ve been served notice that serious hikes to capital gains tax could be coming.
The Guardian reports:
A tax raid on buy-to-let properties and other forms of wealth could raise up to £14bn to help repair the government’s battered finances, after a report commissioned by the chancellor recommended a major overhaul of capital gains tax.
Flagging a tax squeeze on the well-off to help pay for coronavirus, the maximum capital gains tax (CGT) rate of 28% could be raised by Rishi Sunak closer to income tax rates, where the top rates are 40% and 45% in England and Wales.
Under the proposals, there could also be deep cuts in the profits that share investors can make without paying tax, and other technical adjustments that could, in effect, push up inheritance tax bills.
For more on the specifics of the report by the Office for Tax Simplification – which cynics might argue is starting to sound like Orwell’s Ministry of Peace – check out the deep article over at ThisIsMoney. It goes into many of the potential impacts to capital gains tax rates, inheritance taxes, and more.
It’s the nature of tax hikes that people tend to think they’re fine if they believe they’ll never be hit by them.
Whereas of course those tax changes that paint a target on their backs are seen as grossly unfair…
And I am only human.
A little over a decade ago now, I exited a startup company that I’d co-founded. We had some disagreements about its future direction, and I left with roughly the money I’d put in – a few tens of thousands of pounds.
Sounds like a nice lump sum but keep in mind I was mostly just getting the big proportion of my savings that I’d invested (and risked) back, with any additional money hardly covering the income I’d forgone for two years.
I couldn’t put all this into ISAs at once due to the annual allowance. Pensions were different in those days, and looked unattractive to me.
Perhaps I should have spent it all on wine, women, and song? Or put it all into buying a home to live in where it would grow untroubled by the taxman for life.
That’s something nearly everyone with any money thinks is fair, incidentally, but which makes it even harder to keep up if you’re not a homeowner…
In the end I decided to risk investing it in a bunch of share picks outside of tax shelters. This compounded a paperwork issue I already had from previous investments outside of ISAs, but I thought it was worth the hassle and risk if I could hold for the long-term.
This tranche of investments did very well. We’re talking multi-bagging gains in just a few years. Outside of tax shelters.
I’ve managed to carefully defuse some of the gains over the years, but other holdings have continued to grow.
The result is I still have six-figures in capital gains, should I have to sell.
My plan had been to use my annual CGT allowance every year. The money raised would go towards my ISA allowance. I am not and mostly never have been a super high earner. And since I bought my flat I’ve never been over-blessed with free cash to top my ISA up with.
Obviously my plan may have to change if the CGT allowance is reduced or scrapped altogether, or if the rate is hiked.
Now many of you will say “so what?” This wasn’t money I earned by the sweat of my brow.
That’s a coherent argument.
However it’s not an argument that many people seem to apply to the giant windfalls people get when they inherit.
I do and would hike inheritance tax to the max, because the recipient literally did nothing to earn it. They didn’t even forego consumption or take a risk.
But no need to reply in anger. I know most of you disagree!
Proponents of CGT hikes also tend to muddle different things together. So they will talk about a high-earner with cunningly structured finances paying a far lower tax rate then their cleaner, 10% say, and then argue in the same breath that CGT rates should be hiked and the ‘distorting’ annual allowance should be scrapped.
But that 10% tax rate is due to entrepreneur’s relief, not standard CGT. And enabling somebody to realize a little over £12,000 in capital gains from their investments (which may have taken many years to build up) is hardly what enables the big swinging dicks of Canary Wharf to bring home their millions at a lower tax rate, if that’s the complaint.
As for distorting behaviour – the mooted changes will only make this worse. People will hang on to assets that they might otherwise have disposed of, simply to avoid the tax charge.
Perhaps you believe this is all good if you see longer-term ownership as a virtue in itself (I’m unconvinced) but it’s undeniable that it stops people freely juggling their assets to suit their circumstances, or their views about valuation.
Scrapping CGT altogether – for a 0% capital gains tax rate, as enjoyed by radical countries such as New Zealand and Switzerland1 – would surely make more sense from a simplification perspective.
Finally, you might say I don’t deserve my six-figure capital gain because it doesn’t amount to any social good.
But if that’s true (I’d debate it) then that’s true of all our investments.
What’s more, is a CEO on several million pounds a year contributing to the social good?
Heck, is a software engineer perfecting ever more pernicious Internet advertising doing so?
Why not increase tax rates on all incomes we consider socially useless?
Why not indeed.2
You can pay your own way
There’s no doubt that the Covid-19 pandemic and to some extent our chosen response to it has left the State’s finances in a hole.
(I believe it also means we can expect the low interest rates that make that debt manageable to last for years. Probably decades.)
I’ve been warning about this growing bill from day one, even as some others have retorted that we should lockdown and lockdown again, with apparently scant concern for the consequences, financial or otherwise. (Any debate on Covid over on this thread only please.)
But regardless, the mooted £14bn is neither here nor there in the grand scheme of things – assuming it is even recoverable without people changing their behaviour.
If we are going to reform taxes, let’s do it properly.
It’s high time we created a tax system that makes logical sense across the board. We should scrap fiddly income tax bands and cliffs, get rid of tons of exemptions, simplify and massively expand inheritance taxes (I’d do this by taxing recipients rather than the estate) and much more.
In practice though I’m sure we’ll do what we’ve mostly always done – which is whatever politicians can get through the Overton Window.
Okay, the cat has seen the pigeons. Let’s hear what you think, enjoy the links, and have a great weekend!
Stress management – Monevator
Are retail share dealing platforms fit for purpose? – Monevator
From the archive-ator: Not your father’s retirement – Monevator
Note: Some links are Google search results – in PC/desktop view you can click to read the piece without being a paid subscriber. Try privacy/incognito mode to avoid cookies. Consider subscribing if you read them a lot!3
London rents fall 5% amid exodus of workers – ThisIsMoney
New government unit to pay back over £100m in underpaid state pensions to short-changed women – Which
The Law Commission has published a paper on the legal uncertainties of owning shares, bonds, and funds via intermediaries – Law Commission
Investment sites hit by trading outages after positive vaccine news – ThisIsMoney
Are big retailers exploiting lockdown loopholes? [Maybe, but it’s helpful] – BBC
The global rich are rushing to buy UK country estates – Bloomberg via MSN
The FT is hosting a digital discussion on retirement on 30 November with Sir Steven Webb – Sign up at the FT