Until the Chancellor's announcement in his 2007 Pre-Budget Report the main rate of capital gains tax (CGT) was linked to the top rate of income tax. At the time of the 2007 announcement everyone seemed to focus on the effective increase from 10% to 18% CGT on business assets. But that was never the main story.
No one has ever provided a meaningful policy reason for reducing the rate of CGT on short-term speculative gains from 40% down to 18%. It was a welcome tax cut for the rich although this was not widely highlighted as it was introduced by a Labour chancellor. And no one wanted such a generous tax cut to be reversed. However with the pressure now on to find ways to reduce the budget deficit it is inconceivable that CGT will be left untouched. Still however, no one wants to be seen to be calling for tax rises so there is little mention of it in Budget predictions.
In a blog post last year I set out some of the background to the CGT rate changes in recent years: Why are capital gains taxed at less than half the main rate of income tax?
Since then we have seen bankers' bonuses come under attack and there has been some linkage with the way that venture capitalists secure their rewards by way of capital gains taxed at only 18%, previously 10%, rather than 40% (or in future 50%).
The practical problem for the Chancellor is how to reverse the changes he introduced just 2 years ago without being accused of a predictable u-turn. He can of course blame the economy. Alternatively, if the Tories are elected they could secure a double whammy:
- Reverse a recent cut in the rate of CGT that was introduced by Labour without any logical policy justification; and
- Prove that they are not favouring the wealthy as such a move would impact the 'rich' more than anyone else.
As part of a balanced plan, and this would be easier for the Tories than for Labour (due to the U-turn it would require), we should also see a reintroduction of some form of taper relief to incentivise and reward longer term investment. This is pretty much what Gordon Brown promised when he first introduced just such a facility in 1998. To an extent the entrepreneurs' relief, introduced in response in response to howls of protest in 2008, already retains the 10% rate on the first £1m of gains. And this need not change.