CITY A.M. CAMPAIGN
LIKE many MPs, I have received an avalanche of letters and emails from angry and perplexed constituents since the rise in capital gains tax was floated.
These do not come from the ranks of the super wealthy or short-term City speculators. Instead, my anxious correspondents are predominantly people who have “done the right thing” – those who have worked to build up a business, employees who invested in their company, workers close to retirement who painstakingly acquired small share portfolios or those who, having lost trust in pensions, turned to property as a safe haven for their retirement fund.
In short, rather than representing a neat redistributive tax from rich to poor, the proposed rise in CGT risks squeezing those caught in the middle and stifling aspiration and self-reliance to boot. That is why I am today backing the City A.M. CGT campaign.
Capital gains have hitherto been taxed at a different rate from income for good reason. They come from investments which inevitably involve risk. Reduce the incentives to make those investments and you will find there are some unwelcome knock-on effects.
First, strong and growing economies depend upon high levels of investment. Higher levels of CGT will only serve to reduce the pool of savings available for future capital investment.
Second, capital is highly mobile. For that reason economic competitors of the UK’s such as Australia, New Zealand, Switzerland and the Netherlands, have abolished CGT. They recognise that high capital gains tax rates discourage investment.
CGT also clogs up capital markets. Nobody is compelled to sell an asset so uncompetitive rates of CGT will simply encourage those who do not need to realise their gains to switch into other assets or securities.
Moreover, high rates of CGT reduce turnover and liquidity levels in the stock market. In turn the most successful growing companies will find it more difficult and expensive to raise capital.
So if the headline rate is to rise to or near to 40 per cent for non-business assets, restoring a complicated regime of allowances and reliefs to take account of the effects of inflation and length of time over which chargeable assets have been owned sadly might prove an unavoidable compromise to part-protect the interests of the prudent and the elderly, long-term investor.
And whilst business secretary Vince Cable assures us that the proposed higher rates of CGT are designed at “essentially private capital gains, financial capital gains and second homes,” he perhaps fails to appreciate fully that many second home owners have sought to save in such an asset as a consequence of widespread lack of trust in pensions and other financial products.
Similarly, he seems not to have taken into account the disproportionate impact higher rates on property will have on Londoners and those in the Home Counties. Many people who buy a second home outside the capital as an addition to a small London base do so not because they are enormously wealthy but precisely because they are not. It is virtually impossible even for many of those earning multiples of the average national wage to trade up the property ladder in the capital. For those with growing families, the only option is often to buy a house with garden outside London.
Above all, an increase in the rate of capital gains tax may generate neither fairness nor additional revenue.
Mark Field MP
Cities of London & Westminster