Think-tank calls for investors to pay more tax

This think-tank estimates the government will see a tax windfall of £120 billion if its proposed changes are adopted.

Investors who hold money outside of the tax-free ISA wrapper should be taxed at a higher rate, an influential think-tank has proposed. 

According to a new report from the Institute for Public Policy Research, named Just Tax: reforming the taxation of income from wealth and work, capital gains tax (CGT) should be raised to the same level as income tax. The think-tank argues that matching capital gains and income tax rates is necessary to address inequality.

CGT is charged on profits from the sale of assets including shares, funds, second homes or buy-to-let properties, business premises, paintings and antiques worth over £6,000, with the rate dependent on the individual's income and the type of asset sold. Basic-rate income taxpayers pay lower CGT rates of 10% on gains from most assets and 18% on residential property, while higher-rate taxpayers pay 20% and 28% respectively. Moreover, there’s an individual annual exemption of £12,000.

In contrast, income is taxed at either 20%, 40% or 45%. This seeming discrepancy, the IPPR argues, is unfair. According to director Tom Kibasi:

"It is fundamentally wrong that people who get their income from betting on stocks and shares or playing the property market pay less tax than those who go out to work."

By bringing the rate at which capital gains are taxed in line with income tax, the think-tank estimates the government will see a tax windfall of £120 billion, dropping to £90 billion due to the behavioural effect of higher taxes. The IPPR has also called for the individual annual exemption to be slashed to £1,000.

The proposal comes following reports that the Labour Party is considering the prospect of abolishing the current CGT exemption for people's main homes, an idea first floated in a report commissioned by the party.

Such proposals to shake up CGT have come under heavy criticism, with many pointing out that it is essentially double taxation. As Adrian Lowcock, head of personal investing at Willis Owen, notes:

"This tax is a second tax that investors would be facing, having already seen their income taxed before they invested it, so raising CGT would be unfair on investors."

However, says Lowcock, an increase in CGT is unlikely to impact many investors, given the current bumper ISA allowance. He says:

"With the ISA allowance having risen so much in the past decade, most investors should be able to avoid CGT completely and should look to use their allowances to the maximum now to avoid any future changes in the tax."

Most at risk, he argues, are "investors who have benefited from the property boom and were unable to lock the investments inside tax-efficient wrappers".

Similarly, Moira O'Neill, head of personal finance at interactive investor, Money Observer's parent company,  says the proposal should simply serve as a reminder to investors "to max-out their annual ISA limit of £20,000 before considering a general investment account".

Jason Hollands, managing director of Tilney, however, is slightly more concerned. He argues that the CGT proposal is one of many "toxic ideas" being thought up by think-tanks as political parties start to write their manifestos ahead of the next general election.

He notes: "Hiking capital gains tax, alongside other [Labour Party] proposals to raise corporation tax and appropriate up to 10% of the equity of all businesses with more than 250 employees, would be very damaging for UK's competitiveness, a major disincentive for establishing a business here and a disincentive for long-term investment."

Hollands agrees that the proposal underlines the importance of tax wrappers such as ISAs. However, these cannot be taken for granted, he warns, fearing that an increase in CGT may also be accompanied by changes to ISA and pension allowances.

He argues:

"Labour's views on ISAs and private pensions are unknown; it has been eerily silent on these. But given the direction of travel in the current hard-left Labour leadership's thinking, a move to cap or reduce the amount that can be tucked away in ISAs cannot be ruled out, and the removal of higher-rate tax relief on pensions looks a very obvious target for them given that even George Osborne came close to overhauling these reliefs."

When asked for clarification on whether ISAs and SIPPs should also be targeted under any CGT shake-up, the IPPR said this was not something it had looked at yet.