Should capital gains tax be higher or lower?

Rishi Sunak © Anthony Upton-WPA Pool/Getty Images

We have some small suggestions for Rishi Sunak

(Image credit: © Getty Images)

published 23 July 2020

The debt numbers are beginning to look a little scary. Between April and June, UK government borrowing hit a quarterly record of £128bn, twice the total borrowed in all of last year. Total UK debt is now nearly at 100% of GDP. The total for the year could, says the Institute for Fiscal Studies (IFS), hit a once-unthinkable £350bn. How do we pay that off? Some say we don’t have to (see last week’s letter). Some reckon we can just inflate it away. We’d also hope that a good dose of growth will help (I am not giving up on the possibility of a V-shaped recovery).

But at some point, whether we approve or not, it seems likely that there will be, as the IFS put it, a fiscal reckoning – higher taxes or lower spending. Right now, tax is getting all the attention. Some of the more hopeful of the UK’s commentators think now might be the time for a genuine reform of our tax system (see Ed Conway’s thoughts on abolishing almost everything in this week's magazine). We’ve been guilty of this kind of wishful thinking in the past – we’ve suggested all taxes should be abolished in favour of a land value tax; and that the disparity between income and wealth taxes can be sorted out with a gift tax. So far so bad on all these things. Governments mostly aren’t keen on sweeping changes. We are learning to think small.

This brings me to the current state of play of capital gains tax (CGT) – now up for review. Should it be higher or lower? Tapered or indexed to inflation? There are long-term arguments to be had about this (see here). But short term, should the government want a little cash inflow to make the Treasury feel a little better, here are a few ideas. First, slash the top rate of CGT to 8% or below for at least a year. Why? Because there are an awful lot of gains knocking about and an awful lot of people unwilling to crystallise them and pay the tax owed.

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In this week's magazine, for example, you will see the recommendation that income seekers dump the likes of Shell and diversify. That might be fine tax-wise if you bought it at any time in the last decade (the share price is down 52% this year alone). But if you bought in 1995 at £8 and have to pay CGT on your nominal gains (it is now £12), I can see why you would find it hard to press the “sell” button (ask any wealth manager trying to build a portfolio around someone’s legacy holdings in Shell while avoiding CGT). Talk about insult to injury. But cut the rate and they will sell – something that might bring in a bit of real money fast.

Another idea comes from a reader. If what governments really need is a way to access the wealth of the baby-boomers, why not offer them something they really want in return? Peace of mind. You could offer the opportunity to pay up front to annul or buy out future CGT and IHT liabilities. The rate would have to be age dependent (which might make it too complicated). But if you could pay, say, £20,000 now to “buy” £100,000 of IHT credit later, would you? Given how much I know people worry about IHT (how to avoid it...) I suspect the answer is “yes”. You might say that bringing forward tax revenues this way (CGT and IHT collected now can’t be collected later) won’t help in the long term. That’s true. But it might help now. And in the long term perhaps we can have another go at thinking big.

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Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast - but still writes for Moneyweek monthly.

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.