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UK Tax: Tax experts deride capital gains relief

David Cameron's expected central concession over the proposed capital gains tax increase in this month's Budget, a taper relief to cut the rate for longer term profits, was condemned as a "dreadful idea" by tax experts on Tuesday.

The Treasury is drawing up plans to offer a taper in an effort to head off a revolt by Tory MPs, amid intense business lobbying against the proposed increase in the capital gains tax rate from 18 per cent to closer to income tax levels.

The prime minister stressed this week that he understood the concerns that the change would hit middle England, saying he had no desire to "punish people who want to do the right thing and save".

But the independent Institute for Fiscal Studies said on Tuesday that it would be "misguided" to taper the tax rate for profits on shares, second homes and other assets according to how long they had been owned.

"Taper relief is a dreadful idea: it's highly undesirable, in terms of its economic effects," Stuart Adam, a senior research economist at the IFS, told the Financial Times. "Persuading people to hold on to assets they would otherwise sell, to get a lower tax rate, is a misguided thing to do."

It was a mistake to distort normal commercial behaviour with tax incentives, Mr Adam said.

The IFS also warned that the government's proposed exemption of business assets from the CGT increase would significantly undermine one of the prime minister's purported reasons for the change: reducing tax avoidance.

"The Liberal Democrats and Mr Cameron have been stressing the anti-avoidance advantages of increasing Capital gains tax (CGT) by making it harder to reduce tax by converting income into capital," Mr Adam said. "But the people for whom it's easiest to do this are entrepreneurs."

The mounting criticism of the CGT increase is fuelling broader questions about the Con-Lib coalition's overall taxation strategy.

Mr Adam pointed out that encouraging investment - a purported aim of the possible Capital gains tax (CGT) taper - could be done more efficiently using capital and other allowances. But the Treasury intends to cut back on such allowances to fund a Budget reduction in the headline rate of corporation tax.

The British Chambers of Commerce will next week highlight the "inherent contradiction" between the proposed increase in the rate and complexity of Capital gains tax (CGT) and the government's aim of making business taxation simpler and more competitive.

"Repeated changes to Capital gains tax (CGT) with little or no consultation can only leave a negative impression about the UK's approach to tax policy," the business body will say in its pre-Budget submission to the Treasury.

Business is lobbying the coalition government for generous taper relief, coupled with an exemption for business assets, including shares that are held by employees.

Richard Baron, head of taxation at the Institute of Directors, said that failing to offer exemptions could be "counterproductive," deterring the wealthy from Britain and delaying planned asset sales.

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