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Rene Kinzett

A question of taxation and fairness

June 7th, 2010 by René Kinzett

The continued speculation as to whether David Cameron will see through to the end the proposals to move the rates of Capital Gains Tax closer into line with Income Tax thresholds is proving to be the most controversial episode yet in the life of the Coalition Government.

Whilst the move to push CGT rates up to 40% or above has unsurprisingly pressed the Daily Mail to plead the case for the “hardworking families who have made long-standing investments for their future”, a more authoritative analysis and call for a rethink has come from the Chartered Institute of Taxation, who have warned of “unintended consequences” of rushing through CGT reforms, including “a fire sale” of shares and buy-to-let properties.

The row between right-wing Conservative MPs, the Liberal Democrats and Conservative Cabinet Ministers will rumble on until this matter is settled. What cannot be denied is that the deficit inherited from Labour needs to be tackled and tackled now. The opening shots in the spending cuts programme have been made, but represent a tiny fraction of the overall spending deficit. Now we need some serious, sober and courageous reforms to taxation aimed at increasing revenue and reducing our deficit yet further.

The main arguments about the CGT debate, to my mind, centre on “fairness” and the way in which “middle income” earners perceive the changes. The vast majority of UK taxpayers will never be troubled by concerns over paying CGT, yet it is middle earners who are being used as pawns in the argument between the Government and its critics. The desire of the middle-classes to one day, in the hoped for not-too-distant-future to be one of those who are in the CGT-liable category of taxpayers, drives their feeling of the “unfairness” of proposals to bring CGT into line with Income Tax.

As Patrick Collinson points out in the Guardian, the CGT proposals are not likely to cause the “nest egg” investors a great deal of trouble, rather the property speculators who have borrowed money to fund buy-to-let properties and other “unproductive” short-term investments. He also wonders whether the shift from these investments into other vehicle such as Venture Capital Trusts and Enterprise Investment Schemes in order to avoid any new CGT liabilities (as being advised by many Financial Advisers)  might not be such a bad idea.

In any case, surely the system of Tapering Relief could be brought back into play, ensuring that it is the shorter-term speculators who are hit hardest, leaving the longer-term savers and investors paying a great deal less?

For my money, the overriding  issue of fairness in this debate is about what the expected revenue take from this change in CGT rates will be used for. The Coalition Government has pledged to increase the rate of personal tax allowances to £10,000 and the CGT changes will go a long way to fund this move. If I was to chose between taxed on unearned profit into line with rates of income tax and the prospect of helping millions of low and middle income groups, I know which one I would chose.

I trust that Cameron, Osborne, Alexander and Cable will find a way through the current debate and do the right thing for the economy and the vast majority of ordinary taxpayers.