Thursday 12 November 2020 3:59 pm

Aligning CGT with income tax would be a mistake, warns Andersen's tax head

The government’s tax advisory body published yesterday a highly anticipated report into capital gains tax, concluding that the current rules are ‘counter-intuitive’ and create ‘odd incentives’ in several areas.

Instead, Rishi Sunak should increase capital gains tax rates in order to reel in an extra £14bn, according to the Office for Tax Simplification, as it released its findings following a review ordered by Sunak earlier this year. The OTS proposes that Sunak brings CGT in line with income tax rates.  

However, Miles Dean, tax expert and head of international tax at Andersen in the UK, warns that aligning CGT with income tax “is not the answer.”

“The case for lower rates of tax on capital gains is that the asset that produces the gain is more often than not acquired using taxed income. To then tax the gain at income tax rates is pernicious given that the capital has been tied up, [it] isn’t at the disposal of the individual),” Dean told City A.M.

Capital gains tax, which is not charged when someone sells their primary residence, is currently levied at 10 per cent for people in lower income tax brackets and 20 per cent for those in higher income tax brackets. The OTS suggested Sunak should double both of these rates to bring them in line with income tax rates.

“The panic appears to be about income being converted into capital gains, so introducing an overarching targeted anti-avoidance rule to replace the impenetrable morass of the current rules,” Dean said.

 “There is no sensible case to tax gains at the same rates as income. Instead, level down and align income tax rates with CGT,” he added.

In July, Sunak ordered a review of the tax – which is charged when someone sells an asset for profit – as a potential way to claw back revenues after spending more than £200bn on the pandemic. The report is non-binding for the chancellor and his Treasury allies have already distanced Sunak from the report.

UK less attractive

If Sunak were to implement the recommendations, Dean warns that the changes to the taxation of non-domiciled individuals make the UK less attractive for foreign investors and less attractive for UK individuals to stay here.

“Aligning gains with income will result in wealthy foreigners shunning the UK, wealthy Brits leaving and the Conservatives signing their own death warrant,” he said.

Dean pointed out that “it is clear” that most countries agree that gains should not be taxed at income tax rates. 

“Indeed, the UK has myriad anti-avoidance rules to prevent income being repackaged as gains – and these provisions work. To suggest this will help plug the hole left by the knee-jerk response to Covid is shortsighted and doesn’t take into account the first order consequence – that people will leave,” Dean concluded.