Capital gains tax is a damaging tax and the current high top rate is undermining our economic recovery, according to the Centre for Policy Studies.
The paper by Lord Howard Flight and economist Oliver Latham shows that CGT is economically a bad tax because:
■ It discourages entrepreneurship, savings and investment and so reduces economic growth.
■ It distorts capital markets by encouraging individuals to hold on to assets that would be better off under different ownership.
■ It channels funds into tax-exempt assets rather than those with the highest return.
■ The sheer number of exemptions introduced by governments of all stripes is a tacit admission that CGT is a bad tax.
CGT was introduced in the UK in 1965 and has been subject to numerous reforms in the intervening time period. The most recent reforms to CGT occurred in 2010, when the flat rate tax was abolished. Individuals now pay no tax on their first £10,600 of gains in a given year, followed by a rate of 18 per cent if their total annual income is below the higher-rate threshold. Otherwise they pay a higher rate of 28 per cent.
Only Denmark, France, Sweden and Ireland have higher top rates of CGT. Countries that have no CGT on investments include Belgium, Hong Kong, Netherlands, New Zealand, Singapore and Switzerland.
Lord Flight says in his preface to the paper: "An implication of the Treasury's own analysis is that, once the 45p top rate of income tax comes into effect next year, the 28 per cent CGT rate will raise less revenue than a lower rate. This is a ridiculous situation, and one which should be addressed immediately. There is simply no excuse for the Chancellor not to cut CGT to at most 25 per cent in the Autumn Statement."
Capital gains tax is one of the top 10 areas of tax wastage in the UK, accounting for £132.7million of unused tax allowances, according to the Tax Action Report from unbiased.co.uk, the professional advice website.
Where possible hold your investments in a tax wrapper such as a pension or individual savings account where they can grow free of CGT. Make sure you use your annual Capital Gains Tax allowance of £10,600 each year if you have investments designed for capital growth that are held outside a pension or an Isa.
