The Garrulous Jay – Capital Ideas

There is a near universal consensus that Rachel Reeves will do something with Capital Gains Tax (CGT) in her Budget on the 30th October. With this in mind, Chapter 7 of the IFS Green Budget: October 2024 makes for interesting reading…

Many anticipate a simple alignment of CGT rates with income tax rates but, as with so many things in life, it’s not that simple, and the IFS report provides both context and analysis to the options around what the Government may decide to do.

The concluding sentences of Chapter 7 will probably garner universal support and bear repetition here: “Making a policy change credibly lasting requires setting out clear principles and a rationale for reform, rather than simply tinkering and tweaking to raise a bit more cash. Instability and unpredictability are bad for investment.”

The context the report provides is also useful… For example, CGT raises less than 2% of total tax revenue (£15 billion), so even a material increase in CGT will do little to fill the now infamous £22 billion black hole.

Perhaps more surprisingly, two thirds of this tax take is paid by just 12,000 people. Despite this, the IFS argues that “there is a strong case for reform”, as the current CGT regime discourages saving and investment, distorts who holds assets and for how long and lowers productivity.

Their proposed solution focuses on the combination of “base and rates”. In other words, they advocate for reforms not only of the levels of taxation on capital gains, but also what gets taxed….and when.

The base and rates approach argues for far higher incentives for money going into investments, which in turn allow for higher taxation of gains when taking money out. The IFS argues that the provision of tax relief up-front – or perhaps throughout the period of ownership – would allow for the equalisation of tax rates on gains with other forms of ‘income’ (both dividends and earnings) when investments are sold.

They also advocate for the removal of what they see as some of the distortions in the current system that apply to capital gains. Most notably, they would dispense with Business Asset Disposal relief on business sales, as well as the CGT ‘uplift’ on death which effectively wipes out any gains accrued prior to the receipt of an inheritance.

The problem with the IFS proposals is that, as they themselves proclaim, they represent “a fully reformed tax regime” and, as they themselves concede, “even if the government accepted this as the right end goal, it is unlikely that it would make all of the changes in the upcoming Budget.”

The fear for investors and business owners alike is that the Chancellor has decided to cherry-pick the ideas flagged in the report which look most likely to raise revenues and are easiest to implement in the short-term and overlooks the elements which would be most beneficial for long-term economic growth.

Whatever else the Budget delivers, I’m with the pundits in believing it’s highly unlikely the CGT regime will be as it is today on the 31st October.