Abolish capital gains tax and start all over again, think tank urges

Duties on investment and property profits should be abolished, a prominent think tank has said, amid calls for a major overhaul of capital gains tax.

The Institute of Economic Affairs, a free-market think tank, and others are preparing to lobby for major changes to the system after Rishi Sunak, the Chancellor, this week commissioned a review of the levy.

The Office of Tax Simplification said the review would look at all aspects of the tax and whether it was working properly, including rates, exemptions and the 100pc relief that applies to families when they sell their home.

It comes as the Chancellor attempts to balance the books after the costs of the coronavirus crisis. Public expenditure is approaching £1 trillion for the first time and borrowing is expected to reach £322bn this year, a peacetime record. The nation’s debt is larger than its economy.

This has sparked fears that taxes will rise as a struggling economy causes national income to drop. But Treasury officials insisted the CGT review was part of a routine inspection of the system and was not designed to result in policy change.

Philip Booth of the IEA said the best outcome would be to scrap the tax. “Capital gains tax is a complicated and damaging tax. Far from leading to it increasing, this review should lead to it being abolished,” he said.

Nimesh Shah of Blick Rothenberg, the accountancy firm, said the case for scrapping CGT and inheritance tax was that they brought in less than 1pc of the Treasury’s tax revenue but created significant administrative costs for HMRC.

The Institute for Fiscal Studies, another think tank, has proposed sweeping reforms, including increasing rates in line with income tax at 20pc, 40pc or 45pc. Currently, higher-rate taxpayers pay 20pc on profits from the sale of assets such as shares and 28pc on residential property gains, while basic-rate taxpayers are charged 10pc and 18pc respectively.

Both think tanks have said any increase in rates should be accompanied by the reintroduction of protections against inflation, which were scrapped under Gordon Brown, or new allowances to encourage saving. A failure to do so would risk everyday taxpayers paying duties on money that had not actually grown in real terms and encourage people to attempt to game the system, they said.

Mr Booth said that if the tax were not abolished and rates went up as a result of the review, the Government would need to bring back the “indexation ­allowance”. Scrapped in 2008, this discounted inflation from taxable gains. He said simply increasing rates on their own would drive up avoidance and could lessen the overall tax take, as people would come up with new ways to avoid paying larger bills.

Stuart Adam of the IFS said bringing CGT rates into line with the marginal rates of income tax would be the more effective option. “This is contingent on protecting most normal taxpayers and raising revenue only from those who make the largest profits,” he said.

He said the IFS had long called for the introduction of an “average rate of return allowance”. This would allow savers to make inflation-beating gains based on average market returns free of tax, while taxing those who made gains far above normal levels.

Mr Adam also said the Government should abolish the rule that CGT liabilities disappear when you die. He said this distorted behaviour and encouraged people to hoard assets in later life that they might not need.

“Properties and assets [should be] owned by the people who most value them” and not retained for tax-efficiency purposes, he said.

The annual £12,500 annual allowance for income tax and the CGT allowance of £12,300 should be merged, he added.

“This would increase fairness. It is simply bizarre that someone with access to various forms of income can make use of two separate allowances on a chunk of money and pay less tax, but an average earner with just one revenue stream from their job, who can use only one allowance, is taxed more on the same amount, despite being poorer,” he said.

Others have suggested that the Chancellor could scrap various reliefs, inclu­ding the £40,000 lettings relief. This provides some protection for family homes if they have been let for a time, which would make them ineligible for the full primary residence relief. Abolition would add thousands of pounds to a typical tax bill.

An influential group of MPs announced a separate tax review this week to assess the impacts of policy changes after coronavirus. The Treasury Select Committee, which scrutinises the Chancellor, will consider what reforms the economy can bear as the country starts to recover.

Mel Stride, its chairman, said: “Being able to predict what the tax system will deliver under any given set of measures is vital.”

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