TAX NEWS - JUNE 2010

UK Tax: Capital Gains Tax rise will cost economy 61,000 jobs

Coalition plans to increase Capital Gains Tax could cost the UK economy 61,000 jobs and £4 billion, new figures have suggested

by James Kirkup and Andrew Porter, 03 June 2010 -- The calculations from the Adam Smith Institute, a think-tank, emerged as Nick Clegg, the Deputy Prime Minister, signalled that ministers are willing to back down on several aspects of their controversial plans.

A senior Cabinet minister also told the Daily Telegraph that the final policy will reflect the views of senior Conservative backbenchers.

The Government has said it wants to increase the rate of Capital Gains Tax from 18 per cent towards the rates applied to income, which could see Capital Gains Tax rise towards 40 or even 50 per cent.

Capital Gains Tax (CGT) is applied to sales of assets including second homes, buy-to-let properties and share portfolios. Some accountants have suggested as many as a million people a year will be caught by increased tax rates when they sell such assets.

The Daily Telegraph has launched a campaign against the Coalition's plans, winning the support of thousands of readers.

Ministers say the Capital Gains Tax rise is needed to help fund income-tax cuts for low earners.

But because asset-holders have a choice about when they sell and incur Capital Gains Tax, some economists argue that increasing Capital Gains Tax rates could reduce the incentive to sell, leading to a fall in economic activity.

Richard Teather, a fellow at the ASI, studied the evidence from other countries that have experimented with increases in Capital Gains Tax rates.

He concluded that the total cost to the UK economy of raising Capital Gains Tax (CGT) to 40 per cent would be between £3.2 billion and £5.2 billion. That would mean a loss of 61,000 jobs, he estimated.

"An increase in capital gains tax increases the cost of raising capital for business. Investors expect higher returns and therefore businesses have increased costs and less capital," Dr Teather said. "This leads to less production and a lower demand for workers, therefore increasing unemployment."

George Osborne, the Chancellor, will announce the final details of the Capital Gains Tax rise in the Budget later this month.

Many Conservative MPs are unhappy about the plans to increase Capital Gains Tax, which spring from the Lib Dem manifesto.

To lessen the impact of any rise, John Redwood, a former Tory Cabinet minister, last week put forward plans for a new"taper" system, where Capital Gains Tax rates would be lower the longer an asset was held.

Vince Cable, the Lib Dem business secretary and an architect of his party's policy, publicly rejected a taper.

But in a significant intervention, Mr Clegg, the Lib Dem leader, insisted that a taper would be considered. He also said that the Treasury could bow to demands to restore indexation – which allows for the effect of inflation on asset prices – and could even compromise on the new headline rate of Capital Gains Tax (CGT).

Mr Clegg told Radio Four: "It is impossible to start picking off whether you believe in tapering, in whether you believe in indexation – so you don't tax the increase of the value of assets through inflation and you have to couple that with the consideration of what rates you use.

He added: "All of those things will be considered."

Meanwhile, Andrew Mitchell, the International Development Secretary told the Daily Telegraph that Mr Osborne's final policy will reflect the "important" views of MPs like Mr Redwood.

He said: "I think that its absolutely right that there should be a public debate about Capital Gains Tax and all these views should be heard and I am certain that when the Chancellor of the Exchequer comes to make his decision on what to do, he will do so in the light of the cross section of important views that have been expressed."