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Tory backbenchers revolt over CGT

Senior Conservative backbenchers David Davis and John Redwood are leading a revolt over plans to significantly increase levels of capital gains tax.

Redwood: Swamped with support
Redwood: Swamped with support

Writing in today’s Daily Mail, Davis warns the coalition Government’s proposal to hike CGT, potentially to bring it in line with income tax levels, would hit “the hard-working, responsible, self-reliant middle and working classes who want to get on”.

Davis warns that increasing CGT is unlikely to bring in the expected revenues calculated by the Government as it will be avoided by the very wealthy and that the elderly will be hit hardest.

He says: “For the really rich, Capital Gains Tax is a voluntary tax. Those with large estates can afford the expensive accountants who minimise their taxes.

“Even those on middle incomes can often wait before selling their shares or second homes. So when rates go up, people pay less. There is one category of people, however, for whom this is not true — and it highlights a stark unfairness in this tax. The largest group of people who cannot choose whether or not to pay the tax are the elderly.”

Davis suggests introducing a short-term CGT level starting at 40 per cent or 50 per cent which would taper down to 0 per cent the longer assets are held over a five year period.  “This would prevent the problem of switching income to capital for tax avoidance purposes, would encourage long-term saving and investment, would avoid distorting investment decisions, would make us internationally competitive and would raise extra revenue,” he says.

Yesterday, senior Tory backbencher John Redwood (pictured), who is leading the revolt, wrote an open letter to exchequer secretary to the Treasury David Gauke in which he outlined his strong opposition to the CGT rise and suggested an alternative.

Redwood warned the proposed hikes to CGT with allowances for business assets would hit long-term savings outside of tax wrappers and people owning buy-to-let properties.

Redwood suggests a similar proposal to Davis with one year gains taxed at the top level of income tax tapering down to 0 per cent for assets held over five years.

Redwood says: “I have been swamped with support for these suggestions, both from around the country and from Conservative MPs. It would send a strange signal if a Lib/Con government decided to more than double the CGT rate set by a Labour government. It would damage the revenues and be unfair to anyone who saves, is prudent, or who ventures their money for the greater good.”

Speaking today to the BBC, LibDem Business Secretary Vince Cable says the CGT rise was a crucial part of the coalition deal.

He told the BBC: “It is very important that we have wealth taxed in the same way as income. At present it is quite wrong and it is an open invitation to tax avoidance to have people taxed at 40 per cent or potentially 50 per cent on their income, but only taxed at 18 per cent on capital gains; it leads to large scale tax avoidance so for reasons of fairness and practicality, we have agreed that the capital gains tax system needs to be fundamentally reformed.”

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Comments

There are 3 comments at the moment, we would love to hear your opinion too.

  1. The argument used was the “unfair” difference in tax betwen the cleaner paying 20% income tax and the investor paying 18% on frequent gains.

    To redress the imbalance between CGT rates and income tax, surely you jsut need to tax gains at the same rates as income ONLY where the gains look and feel like “income” ie through short term trading or short term transactions. Where a gain is made as a result of what is clearly NOT a income inspired transaction, then there is no argument for the rates to be the same.

    So, taper relief wasnt such a bad idea.

    But, how about an alternative, easy to understand and administer:

    Buy an asset, sell it within 1 yr, 100% of gain added to income and taxed as income

    Sell it within 2 years and half the gain added to income and taxed as income…

    Sell it within 3 yrs, one third of gain added to income and ….etc

    Perhaps after 10 yrs all gains could be tax free to really encourage long term saving again and to do away with the need for so much tax avoidance planning and the associated costs. Youd end up raising more tax in the short term, but would see more people saving for their future…win win?

  2. Julian Stevens 27th May 2010 at 12:23 pm

    Why not just put it back the way it was before Darling changed it?

  3. James Singleton 27th May 2010 at 4:57 pm

    A copy of my letter to Simon Hughes, my local MP:

    Dear Mr Hughes

    I am writing in reference to the governments newly proposed increase in Capital Gains Tax.

    I am most unhappy about how this will be targeting a small group for a very large sum, rather than a large group for a small sum (such a hike in VAT would target).While I appreciate the need to raise funds after the recklessness of the previous administration, I regard this as an attack on the shrewd people who have invested in their future.

    I have had property investments for 7 years, I own three apartments in Southwark, and have been a resident here for 10 years. This has always been a long term strategy for me and I see very little profit in the running of this, since these are highly geared investments with mortgages.

    Because of this sudden dramatic change of government policy, all my efforts for many years might have been a large waste of time and money.

    While on paper I may appear wealthy, personally I am on a low salary, self employed and make no NI contributions. This was designed as an alternative to my pension. I took very large risks and ran my first buy-to-let at a loss for two years, looking to see profit in the long term. I pride myself on being a good and fair landlord, and have provided a very valuable service to my tenants.

    The nature of this proposal is that it scuppers decisions which have already been made. As an alternative a hike in VAT would at least allow people to adjust their decision making process accordingly.

    I predict that the result of this will mean there will be no new buy-to-let landlords being created, since there will be zero incentive to provide this service and take these risks. A shorter supply of rental properties in the borough will inevitably lead to higher rents. Many landlords will be forced to sell in the coming weeks to avoid the increased CGT. This will lead to an oversupply of property in the market which will cause prices to fall dramatically. Few people will benefit from this though since the cost of borrowing is still very high.

    As a senior MP, and with your party now being in government I would be grateful if you could pass on my thoughts, or attempt to influence the chancellor to at least not raise CGT to the foolish flat rates that are being speculated about. He might even consider reintroducing a taper relief for the long term investor, so as to only penalise the short term speculators.

    As things stand this policy will either influence me to dump my properties as quickly as possible to crystallise a gain, or to leave the country for over five years, becoming non-domiciled and thus being exempt from all CGT. If many people follow this strategy the chancellor will end up seeing less CGT contribution in the pot, not more!

    Yours sincerely

    James Singleton

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