THE Institute of Directors (IoD) is against any proposal which raises Capital Gains Tax (CGT) to income tax levels and is delighted to support CityA.M.’s campaign. Our reasons are straightforward. Like City A.M. we believe the proposal would hit thousands of ordinary employees and investors vital to business investment and economic growth.
Of course, ideally we shouldn’t be having this debate at all. The IoD has argued throughout that tackling the deficit in the public finances should be done entirely with spending cuts. However, we are also realists and understand that the coalition agreement requires some new tax rises. The trick now is to make sure those tax rises form a small part of the government’s deficit reduction plan and not aimed at those parts of the economy which are best positioned to generate growth and jobs. Judged against these criteria a CGT hike of the type being contemplated is the wrong option.
What is often forgotten in this debate is the scale of the potential impact on ordinary investors and employees. Of the 230,000 individuals who make gains exceeding the annual exemption each year, half make gains of no more £25,000. The majority of these are not rich people. Individuals with small shareholdings in businesses in which they work and those who have chosen to invest in order to provide for their retirement so that they are not a burden on future taxpayers would all be affected. But to make matters worse, two thirds of the gains are made on shares and securities, assets which represent vital investment in businesses. If the government wants to encourage people to invest in businesses of all kinds, entrepreneurial start-ups being one example, what kind of signal would doubling CGT rates send? The answer is obvious.
If CGT rates have to go up it’s essential that this happens in a way that minimises the damage to entrepreneurial activity and long-term investment. A generous taper relief would be our preferred option. If that is not possible, the impact could be reduced by ensuring that all shares held by directors and employees qualify for entrepreneurs’ relief, charging reduced rates on other shares and not extending the 50 per cent rate of income tax to CGT. I just hope the government understands the strength of feeling on this issue in the business community and among ordinary investors. Ministers have said that they care about the impact of the tax system on enterprise. They now need to prove it.
Miles Templeman is the IoD’s director-general.