VIEW FROM THE HOUSE – The unanswerable case for ditching CGT and IHT

VIEW FROM THE HOUSE - The unanswerable case for ditching CGT and IHT

Getting rid of capital gains and inheritance tax may be moreachievable than reductions in income tax by Michael Stern,Conservative MP for Bristol North West

In recent articles, I have concluded that Labour’s pledge of a 10% starting rate for income tax was either unachievable or meaningless without further definition of its scope, while the Government’s aim of a 20% basic rate is achievable, albeit over a longer timescale than currently implied. More attainable in the short term is the Government’s pledge to abolish capital gains tax and Inheritance Tax. I believe these taxes can be abolished in the first Budget after the General Election with a net benefit to the Treasury.

Why do these two taxes need to be abolished? Part of the reason is that they have ceased to be effective, and their structure is now so constrained by their origin that they can no longer be amended in any sensible fashion.

If you were designing a new tax on lifetime cash accretions today, you would not start by limiting the scope of the tax to one particular type of transaction in a limited range of assets. If you were designing a new tax on substantial profits arising on the death of a fellow-citizen, you would not seek to include the nominal transfer of assets in which the national interest can only be damaged by their outright conversion into cash, usually to the benefit of either a foreign purchaser or a competitor.

And if you were designing either tax anew, you would seek to ensure that they did not constrain free markets, and did not seek to hamper the normal human desire to leave one’s children better off.

But if these two taxes are to go, how are they to be replaced. A belief has grown that it is the Government’s intention to leave the substantial purchaser of shares or property paying less tax on his income from resale of those assets than the average barrowboy pays on his income. I fear, however, that such a belief is less than realistic. It is equally unrealistic to assume it will be sufficient for the Inland Revenue to rely on existing provisions for the taxation of dealing profits as income: every tax practitioner would agree with the Revenue that such provisions do not provide the certainty we require of a tax system. After all, they are dependent on measuring the psychological gap between dealing and investment.

So what we can expect as a replacement for CGT and IHT is a tax on accretions of cash or other liquid assets.

Clearly, such a tax will need a de minimis exemption, probably at around the level of the present personal exemption for CGT, and at a very much higher level (say u250,000) for accretions on death. Obviously, it would be inappropriate for such accretions to be taxed at a higher rate than ordinary income – after all, why should someone suffer because their means of sustenance comes in lumps rather than as a steady flow – and so the higher rate of CGT imposed by Chancellor Lawson will have to go.

Indeed, it may be possible to set the rate of the new tax lower than income tax without the Treasury giving up any of the yield of the two existing taxes that are being replaced. But if the next Chancellor decides to settle for the same rate of accretions tax as income tax in order to create scope for movement in other taxes or spending, who could blame him?

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