A Political CGT Blueprint

THE CITY GRUMP

As government debt skyrockets, thanks to Covid19 lockdowns, naturally the Treasury’s thoughts turn to increasing taxes.  Some think the holy grail is to seek out tax, which will be worth collecting and somehow be seen to make life fairer for us citizens. To this end the Treasury commissioned the Orwellian sounding Office for Tax Simplification (OTS) to come up with ways of reforming CGT.  In a nutshell their recommendation is that CGT should be brought into line with your income tax rate and hey presto this would immediately raise some £14bn per annum for the government coffers.  A classic soak the rich ploy.

Leaving aside the question of would £14bn actually be raised (it won’t), we have to recognise that virtue signalling is all the rage in Westminster these days so, for the time being at least, we will have to take this on board and come up with a political blue print for CGT. Accordingly, the politicians need to be supplied with something that acknowledges the current tax is flawed and which uses reform to reward those who genuinely put their capital at risk in an effort to grow the economy.

In my view there are indeed definite abuses of CGT, which should be terminated. Two immediately spring to mind.  The first is that venture capitalists have found a way to avoid the risk of putting up significant equity capital and yet benefit massively from lower rate CGT when it comes to selling on at a profit companies they are involved with. This is the ubiquitous “carried interest” whereby 20% of the profit on sale is deemed the venture capitalist’s reward and is taxed, not at his/her income tax rate but at the lower CGT level. Ergo no risk and lots of reward. These days a political “no,no” if ever I saw one.

The second abuse, in my opinion, is profit on the sale of second homes is treated as a capital gain and not as income. Why should this be? Already if you sell your main residence at a profit you pay no tax so why should you just pay a relatively low rate of tax if you then go onto sell a property you do not live in for most of the year? Again in an age when houses are increasingly beyond the reach of the non baby boomers it must be fast becoming politically unacceptable to see second home owners  using such a tax advantage.

To go back to a point I raised earlier, it must make political sense to reward those who genuinely put their own capital at risk and, courtesy of Covid19, there has never been a more pressing time for the deployment of such risk capital. Thousands of existing businesses need refinancing and thousands of new enterprises will be struggling to raise capital in these dark times. What could be more politically acceptable than to find a way of helping out? Step forward CGT. My blueprint is straightforward and effective. In a previous City Grump I suggested there should be no CGT paid on investment in smaller quoted companies. In view of that fearful OTS report let me expand on this:

Accordingly my proposition is CGT should now indeed be raised to income tax levels but with the very important exception of investment in qualifying UK businesses that are capitalised at less than £250 million at the point of investment. Non qualifying business would be the same as applied in the Enterprise Investment scheme, such as those that deal in property or offer financial services.

The argument which is always levelled at those who defend the current Capital Gains tax rate is it is a tax that only benefits the rich and of course none of the current Westminster occupants want to be seen to be doing that. The present taxing of second homes and “carried interest” falls straight into the arms of that OTS Report. Conversely, the beneficial taxing of those who put their capital on the line to raise up our smaller businesses is exactly what Sunak and the PM can rightly sell to the electorate. Accordingly, I commend this CGT blueprint to the House.

The City Grump has spent some 40 years in the City of London. He started as a stockbroker’s analyst but after some years he decided he was too grumpy to continue with the sell side of things so he moved to the buy side and became a fund manager for the next 20 years, selling his own business in the 1990s. Post the millennium, he found himself in turn chairing a stockbroker, a financial PR company, and an Exchange. He still keeps his hand in, chairing a brace of VCTs and investing personally in startups. The City Grump’s publications are available here.