Be mindful of entrepreneurs in CGT tinkering, warn peers

22 Jan 2021

A peer has asked the Government what steps it has taken to ascertain the impact of the equalisation of capital gains tax (CGT) to income tax on entrepreneurs starting new businesses, after the move was suggested in an Office for Tax Simplification report in November.

Lord Leigh of Hurley, Conservative and a chartered tax adviser (pictured thanks to Parliament UK), said CGT is different from other taxes, in so far as it rewards capital that is invested and is at risk. We need entrepreneurs, particularly serial entrepreneurs, to start new businesses in the UK, he argued.

Lord Northbrook, Conservative, pleaded with the Chancellor to keep CGT rates the same, and said that lower rates of tax, particularly CGT, can lead to higher revenues for the Treasury.

Lord Colgrain, Conservative, said that to foster the level of entrepreneurial investment we need after both Brexit and the pandemic, consideration should be given to increasing business asset disposal relief. He wants the Government to look again at the calculation of CGT on private equity investments, where the current arrangements are disproportionately disadvantageous to taxpayers. Government spokesperson Baroness Penn replied that the regime for business asset disposal relief was changed recently and has kept the relief focused on small business owners. Penn said the Government have no plans to change rules around carried interest.

Viscount Trenchard, Conservative, said the rebasing for CGT purposes of assets on death, coupled with the ability to transfer via a surviving spouse who expects to live seven years, distorts the transfer of assets down the generations. How about introducing a capital tax regime like those of Canada and Australia, where there is no inheritance tax but also no exemption from CGT on death—instead, 50 per cent of the capital gains arising on death is aggregated with the beneficiary’s other income and charged to income tax, leaving the other 50 per cent untaxed? Baroness Penn replied: “Inheritance tax is currently the main tax levied at the point of death. However, I am sure the noble Lord will be aware of the Office of Tax Simplification’s report on inheritance tax; the Government are considering its findings carefully.”

Labour’s Lord Sikka opined that taxing capital gains at the same marginal rates as income tax could end many tax avoidance schemes. Sikka also pointed out regional disparities with CGT, saying that London and the south-east of England account for around 27 per cent of the UK population but receive 50 per cent of CGT relief.

That the OTS deemed it necessary to split the findings of its review into two reports serves only to highlight the complexities and risks of tax reform, suggested Lord Tunnicliffe, Labour. He said it is vital to remain mindful of the potentially significant behavioural changes and wider economic impacts that may result from seemingly small changes to tax policy.

Baroness Bowles of Berkhamsted, Lib Dem, suggested there is a case for reducing the percentage of shares that must be sold to an employee ownership trust to qualify for CGT relief or some partial relief. Baroness Penn replied that the enterprise management incentive has been protected during the COVID-19 outbreak; the Treasury has prioritised urgent support measures for people, amending legislation so that the scheme can still be used by affected firms where employees are furloughed or where their working hours have been reduced as a result of COVID.

Lord Palmer of Childs Hill, Lib Dem, said business asset disposal relief is mistargeted if its aim is to stimulate investment. Lord Palmer said it has become a form of retirement relief for successful and wealthy entrepreneurs.

Crossbencher Lord Bilimoria said the UK’s tax system needs to support a competitive and dynamic economy. Businesses have suffered hugely during the pandemic and now is not the time to talk about raising taxes via CGT or corporation tax. “Raising taxes will stifle our recovery from the pandemic and hamper business investment and inward investment into the country, making the UK economy and businesses less competitive. We need to encourage entrepreneurship and investment into businesses; that will create the jobs that pay for taxes, which will increase our tax take,” he said. Baroness Penn replied that she ‘cannot deny that, in future years, we will have some difficult decisions to take on balancing the books and recovering from the pandemic’.

Baroness Penn said a report by the Wealth Tax Commission found that, on a narrow definition, UK taxes on wealth are about average for G7 countries, and on a slightly wider definition, UK taxes on wealth are among the highest of the G7 countries.

The full exchanges in the 20 January 2021 debate are here.

By Hamant Verma