Gary Barnett's Blog

The chancellor’s announcement last year that there would be a a flat rate of 18% for captial gains tax was pretty stupid.

Heralded (by the government) as a poke in the eye for the fat-cat corporate raiders and private-equity millionaires it was, in fact, a great big bung for people who make their money out of short term speculation.

The chancellor has “revised” the CGT plans – and while they are slightly improved – under the revised scheme small business-owners selling their businesses will pay only 10 per cent CGT, as long as their lifetime gains do not exceed £1m. But to qualify you have to own at least 5% of the company – so most employees will be excluded.

This revised scheme still benefits the raiders, and still penalises small business owners – and (more importantly in my view) employees who invest in their employers.

I’m with Mr Holway on this – I think it is silly.

It’s a tax that benefits the rich, at the expense of the less wealthy.

Taper Relief

Under taper relief, share owners would have paid plain old income tax (40% for the higher earners) on the gains they made in assets they’d held for less than a year. The taper relief rules dramtatically reduced the tax liability on assets that were held for longer (after one year they only paid tax on half the gain, and after two they paid tax on one quarter of the gain).

But now, even if you’re fabulously wealthy, you get to pay 18% tax on your capital gains – While a hard working ordinary soul, who just so happens not to have had the advantages (and luck!) of the armani suited city slickers gets to pay standard tax on all of the money they make.

But capital gains aren’t income are they? Well, for the majority of people that is true – A company employee who owns shares in her employer doesn’t count any gain as income, a small business owner who over the course of 5 or 10 (or 20!) years builds a business from scratch doesn’t equate the gain as income (in many cases the value vested in a business is looked at as their “Pension”) – But in many cases the “big guys” view capital gains in exactly the same way that they view income – their contracts include specific terms about releasing capital gains – they budget on the basis of their expected capital gains.

The revision is a sop to small business owners (who were among the most vociferous complainers about the proposed change) – But the guy in the warehouse, who over the years has bought shares in the company he works for doesn’t get any benefit from the changes.

What was wrong with taper relief anyway?

I don’t think that there was much wrong with taper relief. It’s a little complicated but… god knows, if you’re going to make a chunk of change, you can afford to pay an accountant to work it out for you!

Taper relief was seen as benefitting “fat cats” – but even here I think there’s a distinction to be made. If an entrepreneur builds a company over 5 or ten years, and that company grows in value then it almost always follows that he or she has created jobs, promoted entrepreneurship and supported the economy. Whether the gain is £10,000 or £10,000,000 they’ve made a contribution, I understand the natural desire to add a “cap” to any relief – but why create a situation where it makes sense to work hard and be successful… up to a point, after which the incentive is lower? On the other hand the financial engineer who picks up some shares and then by some “vehicle” is able to double their value in six months can’t be said to have made the same overal contribution.

If I were reforming CGT I’d do the following -

First, I’d deal with the “my business is my pension” case – I’d provide some means to enable capital gains in a business you own to be treated as if they were pension contributions. Let’s say – if you pay your gains into a pension fund, then you pay no CGT at all.

Next, I’d change the taper rules, to give them a much longer tail – There could be a lot of debate over the tail, but I’d do something simple – Let’s say 10% at one year, 20% at two, 30 at three and so on up to 90%.

Would my system reward people who make long term investments whether they are investors or employees, while not allowing wealthy speculators to take advantage of a relief that isn’t intended for them?

What do you think?

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