A tax raid on buy-to-let properties and other forms of wealth could raise up to £14bn to help repair the government’s battered finances, after a report commissioned by the chancellor recommended a major overhaul of capital gains tax. Flagging a tax squeeze on the well-off to help pay for coronavirus, the maximum capital gains tax (CGT) rate of 28% could be raised by Rishi Sunak closer to income tax rates, where the top rates are 40% and 45% in England and Wales.
Under the proposals, there could also be deep cuts in the profits that share investors can make without paying tax, and other technical adjustments that could, in effect, push up inheritance tax bills. The findings of the review come as the coronavirus pandemic has pushed Britain’s national debt to more than £2tn, or more than 100% of GDP, as spending has soared and tax receipts have collapsed dramatically. The budget deficit – the annual shortfall between spending and tax income – is expected to balloon to reach than £400bn this year, amid forecasts that the pandemic will push the country into a double-dip recession. The proposals are contained in a report from the Office of Tax Simplification, which was set up by the former chancellor, George Osborne, and was asked by Sunak in July to compare CGT with other taxes and make proposals in order to iron out distortions. The changes called for by the OTS are similar to plans laid out by the Labour party under Jeremy Corbyn ahead of the 2019 election, as part of proposed reforms to reduce soaring levels of wealth inequality in the UK. About £8.3bn of capital gains tax was paid in 2017-18, compared with £180bn of income tax by 31.2 million individual taxpayers. Bill Dodwell, tax director of the OTS, said: “If the government considers the simplification priority is to reduce distortions to behaviour, it should consider either more closely aligning capital gains tax rates with income tax rates, or addressing boundary issues as between capital gains tax and income tax.”
Currently there are four different rates of CGT. For basic rate income tax payers, the CGT levy is 18% on second homes and buy to lets, and 10% on other assets. For higher rate taxpayers, the rates are 28% and 20% respectively. The OTS said: “A rough static costing suggests that alignment of CGT rates with income tax rates could theoretically raise an additional £14bn a year for the exchequer.” However, it also noted that the final figure could be substantially less, due to “behavioural effects” such as people choosing to delay the sale of a property. The OTS stressed it was not calling for higher taxes, as setting rates was government policy. Landlords who have made large profits since investing in buy to let in the mid-1990s would likely to be among the big losers from any rise in CGT. However, rather than triggering a CGT charge by selling a buy to let, landlords may instead choose to hold on to the property. Alternatively, there could also be a rush to sell before higher CGT rates come in. The annual CGT allowance, called the annual exempt amount (AEA), could also be under threat. The allowance means that the first £12,300 of profits from trading in shares and property is currently free of CGT. But the OTS said the government “should consider reducing its level” to between £2,000 and £4,000. The report said: “The AEA clearly distorted investment decisions. Around 50,000 people report gains annually close to the threshold and so ‘use up’ the annual exempt amount as if it were an allowance – which is particularly easy for holders of listed share portfolios.” Robert Palmer, the executive director of Tax Justice UK, said polling by the campaign group had found Britons would support higher levies on wealth. “A hedge fund manager earning millions from their wealth should pay higher tax rates than a nurse. But the current rules mean some people earning millions can get away with rates as low as 10%,” he said. “As we build back from coronavirus, this should be a no-brainer for Rishi Sunak.” The Resolution Foundation urged the government to raise £40bn by launching a health and social care levy and imposing a windfall tax on pandemic profits to fix the public finances after the Covid-19 outbreak recedes. It said a special tax to pay for the health service would consist of a 4% annual flat tax rate on all incomes, including capital gains, over £12,500. There would be offsets for people earning below £19,500. A pandemic profits levy of 10% on supra-normal profits of the small minority of firms that have done better than normal in 2020, such as big technology firms, could also be used to raise raising a one-off £130m. Warning that the government was on track for a £400bn deficit this year, the thinktank said wealth taxes should also be used in response, and that corporation tax should also be increased to raise billions of pounds for the exchequer. However, it called on the chancellor to delay the task of repairing the public finances until the economy has fully recovered from the pandemic – expected to be 2023 at the earliest – to avoid the mistakes made following the 2008 financial crisis when George Osborne undermined the recovery by launching a decade-long austerity drive.