Another Prime Minister, Another Chancellor – Same Old Ideas when it comes to capital gains tax
We’ve developed a habit in this country: we change Prime Minister, change Chancellor, and they promise a “new approach” to tax. I have to say, I wonder if we would see a churn of PMs on such a regular basis if we didn’t have rolling 24-hour news. The briefings and the back stabbings have always been a part of UK politics, but the constant commentary puts a magnifying glass on all of that, with no time or space for things to cool down.
Wes Streeting’s backing of Andy Burnham today may be dressed up as party “unity,” but it reads more to me like political positioning. If Burnham gets the keys to Number 10, which he is odds on to, Streeting would like to be his next-door neighbour.
Streeting has already told us what he wants to do with the Treasury if he gets there. Last month, he said that if he got into power, his focus would be on what he calls a “wealth tax that works”.
Strip away the language and the core is simple: bring capital gains tax (“CGT”) in line with the top rates of income tax (either 40% or 45%), and clamp down on the use of capital to dress up what some within government consider to be income. At the same time, he has hinted at preserving lower CGT rates for “genuine entrepreneurs,” which, if the headline rate went up, would be entirely sensible.
This does sound quite familiar, and that’s because they (Labour) have done this before, via former Chancellor Gordon Brown, back in 1998 when he worked within Tony Blair’s government.
Before 2008, CGT was effectively aligned with the top rates of income tax, but with a relief called “taper relief” layered on top to reduce the burden.
The policy was meant to reward long-term investment, particularly investments in “business assets” (including shares in trading companies). If assets were owned for long enough, the effective CGT rate on them fell dramatically – to around 10% in some cases for higher-rate taxpayers.
That was New Labour’s model: high headline rates, softened by reliefs to keep entrepreneurs happy – and it worked well.
Wes Streeting’s approach isn’t a million miles away from that: higher rates for most – a good headline grabber, but preferential treatment for those who can be positioned as taking real economic risk – those who create and build businesses.
That trade-off matters because the economics haven’t changed, nor have people’s behaviours. If CGT rates are hiked up too far, taxpayer behaviour will shift. People won’t want to sell their companies. Transactions will dry up. There will be a period of stagnation and a drop in the tax take. Gains will sit unrealised because business owners will say, reasonably so, that the tax cost feels too high. The policy will have failed.
On the other side, if you carve out reliefs, you create boundaries. Who counts as an entrepreneur? What qualifies as risk? Where does investment end and tax planning begin?
That was exactly where taper relief ended up: conceptually neat, practically messy.
It also became increasingly hard to defend. Two people making similar gains could face very different effective tax rates depending on how long they had held an asset or how it was classified. Complexity crept in, distortions followed, and eventually the whole thing was scrapped in favour of a simpler regime – business asset disposal relief.
We seem to be edging back to 1998, though.
To be clear, Streeting is right about one thing: the gap between how we tax income and capital is politically exposed. It’s easy to point to perceived unfairness, and even easier to sell reform on that basis, even if economically it makes little sense without bringing in some reliefs.
If Streeting does end up as Chancellor, none of this should come as a surprise. We are unlikely to get a clean, radical system. We are far more likely to get a hybrid: higher rates, targeted reliefs, and a renewed attempt to separate “good” capital gains (trading) from “bad” ones (investment).
Another Prime Minister. Another Chancellor. And, when it comes to CGT, a distinct sense that we’ve been here before. Things Can Only Get Better!
