To ask Her Majesty’s Government, further to the report by the Office for Tax Simplification OTS Capital Gains Tax Review: Simplifying by design, published on
My Lords, in July 2020, the Chancellor commissioned the Office of Tax Simplification to examine and provide recommendations on how to make CGT as simple and efficient as possible. The Government are now considering this report and its recommendations. Any changes to the tax system will take place at a fiscal event and be informed by appropriate analysis of the impact on those affected by such changes.
I am sure my noble friend the Minister will agree that, while we all want tax to be as simple as possible, one has to recognise that capital gains tax is different from other taxes: it is to reward capital that is invested and is at risk. The Laffer curve for capital gains tax is different from the curve for income tax, and we need entrepreneurs, particularly serial entrepreneurs, to start new businesses in the UK.
My Lords, the Government absolutely realise the vital role that entrepreneurs and small business people play in the UK economy. We ensure that, in assessing any tax changes, the impact is analysed, including any behavioural impacts of those changes.
My Lords, I begin by drawing attention to my entry in the register of interests. Does the Minister agree that by taxing capital gains at the same marginal rates as income tax, the Government could end many tax avoidance schemes? Secondly, London and the south-east of England account for around 27% of the UK population but receive 50% of capital gains tax reliefs. What assessment have the Government made of the regional disparities created by their capital gains tax regime?
My Lords, the Government are absolutely committed to levelling up across the UK, including by incentivising investment in areas outside London and the south-east. When it comes to capital gains tax and wider tax measures, the report by the Wealth Tax Commission actually found that, on a narrow definition, UK taxes on wealth are about average for G7 countries, and on a slightly wider definition, our taxes on wealth are among the highest of the G7 countries.
My Lords, the proposals for equalisation are currently in a report from the Office of Tax Simplification and do not represent government policy—although of course the Government will look at the recommendations of that report very carefully.
My Lords, the Government always consider the need to balance raising revenue with the principles of fairness and market efficiency when we take tax decisions. All tax decisions also take into account the impacts of behavioural change for those affected. At any fiscal event, the Government produce and publish policy costings which are scrutinised by the OBR, and these include relevant behavioural impacts on revenue.
My Lords, business asset disposal relief is mistargeted if its aim is to stimulate investment. Does the Minister agree that it has become a form of retirement relief for successful and wealthy entrepreneurs?
My Lords, the Government reformed business asset disposal relief at last year’s Budget, focusing the relief on the largest number of small business owners, ensuring they can still benefit from it, while reducing the allowance for the small number of taxpayers who were benefiting disproportionately from previous levels of relief.
My Lords, I refer to my interests in the register. Does the Minister agree that, in order to foster the level of entrepreneurial investment we need after both Brexit and the pandemic, consideration should be given to increasing business asset disposal relief? Secondly, does she agree that the Government should look again at the calculation of CGT on private equity investments, where the current arrangements are disproportionately disadvantageous to taxpayers?
My Lords, as I said, the Government recently changed the regime for business asset disposal relief, but I reassure my noble friend that the change has kept the relief focused on small business owners and that over 80% of those using the relief were unaffected. On his second point, carried interest is a share of the profits made by a financial fund which is treated as capital gains; the Government have no plans to change rules around carried interest, but we keep all tax policy under review.
My Lords, our tax system needs to support a competitive and dynamic economy. Businesses have suffered hugely during the pandemic. Does the noble Baroness agree that now is not the time to talk about raising taxes via capital gains tax or corporation tax? Does she also agree that raising taxes will stifle our recovery from the pandemic and hamper business investment and inward investment into the country, making our economy and businesses less competitive? We need to encourage entrepreneurship and investment into businesses; that will create the jobs that pay the taxes, which will increase our tax take.
I absolutely agree with the noble Lord’s sentiment about the importance of entrepreneurs and businesses to the country’s recovery. As I said to my noble friend earlier, the Government always consider the need to balance raising revenue with the principles of fairness and market efficiency. However, I cannot deny that, in future years, we will have some difficult decisions to take on balancing the books and recovering from the pandemic.
My Lords, that the Office of Tax Simplification deemed it necessary to split the findings of its review into two reports serves only to highlight the complexities and risks of tax reform. The Government often warn of the perils of unintended consequences; this has certainly been the case with previous iterations of capital gains tax. Does the Minister agree that it is vital to remain mindful of the potentially significant behavioural changes and wider economic impacts that may result from seemingly small changes to tax policy?
Does the Minister consider that social impact, as well as behavioural impact, should be taken into account? Is there not a case for reducing the percentage of shares that must be sold to an employee ownership trust to qualify for capital gains tax relief or some partial relief?
My Lords, a number of factors are taken into account by the Treasury and the OBR when assessing tax policy. On the second point, the enterprise management incentive has been protected during the Covid-19 outbreak; the Treasury has prioritised urgent support measures for people, amending legislation so that the scheme can still be used by affected firms where employees are furloughed or where their working hours have been reduced as a result of Covid.
My Lords, the rebasing for CGT purposes of assets on death, coupled with the ability to transfer via a surviving spouse who expects to live seven years, distorts the transfer of assets down the generations. Has the Minister considered introducing a capital tax regime like those of Canada and Australia, where there is no inheritance tax but also no exemption from CGT on death—instead, 50% of the capital gains arising on death is aggregated with the beneficiary’s other income and charged to income tax, leaving the other 50% untaxed?
My Lords, inheritance tax is currently the main tax levied at the point of death. However, I am sure the noble Lord will be aware of the Office of Tax Simplification’s report on inheritance tax; the Government are considering its findings carefully.