CITY A.M. today launches a campaign against plans to hike capital gains tax (CGT), calling on David Cameron to rethink proposals that would clobber private investors.
Yesterday, senior City figures – including private equity guru Jon Moulton, serial entrepreneur Luke Johnson and Tullett Prebon boss Terry Smith – became the first to support our campaign.
Tory MPs David Davis and John Redwood gave us their backing, as did Tory peer Lord Forsyth. Several other MPs said they supported us, but weren’t yet ready to go public.
It comes amid growing fury in the City and business community over proposals that would more than double the CGT rate, with one of the City’s top money managers, Fidelity International, yesterday also slamming the proposal.
The Liberal-Conservative coalition government has said it will increase CGT on non-business assets to rates “similar or close to” income tax, suggesting it is set to soar from 18 per cent to 40 or even 50 per cent.
This newspaper believes that such a move would unfairly punish small shareholders and buy-to-let investors, damage the economy and even result in lower tax revenues.
The best option would be to leave the CGT regime as it is – or cut the rate further to boost enterprise.
However, we recognise that the Tories must give some ground to their Lib Dem coalition partners, who remain staunch supporters of hiking CGT. That is why we favour the alternative regime put forward by Redwood and Forsyth among others, which would introduce a capital gains tax rate that drops over time.
Under this scheme, gains of under one year are taxed at 40 per cent, in line with income tax. Two year gains are taxed at 30 per cent, three years at 20 per cent and four or more years at 10 per cent. In fact, the government should go further and introduce a zero per cent rate on gains after five years.
If people are disguising income as short-term gains, this regime will stop them while rewarding those that invest in the economy.
Luke Johnson, the serial entrepreneur behind Pizza Express and former Channel 4 chairman, told City A.M.: “An increase in CGT will send a signal to entrepreneurs that this government is not pro-business. They should not forget that it was Gordon Brown of all people that cut CGT. Should the Tories be the ones to increase it?”
And City financier Terry Smith said those taking a long-term investment view should be encouraged: “For the coalition government to introduce a blanket increase in CGT rates would in effect be a retrospective tax for those who have accumulated gains over the long term… and retrospective taxation is rarely if ever defensible.”
Tim Linacre, chief executive of stockbroker Panmure Gordon, said City A.M.’s campaign was “sensible and logical”. “If someone is investing long-term for the good of the country then it is just crazy to raise CGT further, particularly without an indexation allowance for inflation. It’s a fruitcake of an idea.”
The campaign also won the support of Better Capital boss Jon Moulton and Hargreave Hale fund manager Patrick Evershed, also president of the Cities of London and Westminster Tory Association.
Yesterday, David Davis told City A.M. that hiking the rate on capital gains indiscriminately would have a “deleterious” effect on the economy.
“This won’t raise money – it might cost money. All the evidence from the US and Australia shows that as rates go up, tax take goes down. There would also be a competitive problem – Holland and Switzerland have a zero per cent rate,” he said.
Gary Shaughnessy, UK head of Fidelity International, welcomed Redwood and Davis’ intervention and urged the government to reconsider before it is too late. He said “We are particularly interested in defending the interests of prudent individuals who invest for the long term.”
To his credit, chancellor George Osborne is listening carefully to those who caution against an indiscriminate hike in CGT. Treasury sources insist he has not made up his mind. There is all to play for.
The government has said there will be “generous allowances” for entrepreneurs. If done properly this could limit the damage of the tax, but the exemptions would have to be very large. It would be better to adopt our plan.
Encouragingly, Cameron will use a major speech today to promise a private sector recovery that will transform the UK. “We have been sleepwalking our way to an economy that is unsustainable, unstable, unfair and, frankly, uninspiring,” he will say. “Can we re-open Britain for business? My answer is an unequivocal, emphatic yes.”
This newspaper couldn’t agree more. That is why Cameron and Osborne must resist the pressures of their Lib-Dem coalition partners and return to the drawing board.
• To join the City A.M. campaign email firstname.lastname@example.org