Capital gains tax changes a ‘recipe for disaster’, businesses warn

Business leaders in the UK have warned Chancellor Rishi Sunak that he risks demoralising entrepreneurs if he acts upon proposals to reform capital gains tax.

The chancellor is considering proposals by the Office of Tax Simplification (OTS) to reform capital gains tax to help pay for the COVID-19 pandemic.

The review’s proposals include aligning capital gains rates with much higher income tax levels and lowering the threshold for paying the tax, as well as making it payable when inherited items are sold, and abolishing tax breaks for investors.

Raising capital gains tax to match income tax bands could generate £14 billion a year, according to the OTS. However, such a move would be a financial blow to business owners, investors and second-home owners.

For a basic-rate taxpayer, the levy on profits from asset sales would rise from the present level of 10% to the income tax level of 20%, while the tax on profits from second and investment property sales would go up from 18% to 20%.

For higher-rate taxpayers it would rise from 20% on asset sales and 28% on property sales to 40%; this would be 45% for additional-rate taxpayers.

A recommendation to reduce the threshold at which the levy kicks in from £12,300 to £5,000 would further increase the tax due on capital gains, The Times reports.

However, business leaders have said that plans to match capital gains rates with higher income tax levels would hinder economic recovery, encourage a mass exodus of business leaders and dampen business morale further among the UK’s middle and upper classes.

Robert Kilgour,  founder of the Renaissance Care group, labelled the change to the tax as “crazy”, adding that it would be “a recipe for disaster”. Mr Kilgour said the reforms would act as a disincentive to risk takers that the UK needs fired up and incentivised “to get us out of this mess”.

The Federation of Small Businesses (FSB) said that the proposals risked “stifling rapid enterprise growth and serial entrepreneurship — things we want to increase within our small business community, not diminish”.

Shalini Khemka, chief executive of E2E, an entrepreneurs’ group, and a government adviser, added: “The timing is all wrong. Business owners are dealing with the enormous challenges posed by a global pandemic and the prospect of Brexit — it will be a real blow for them if they feel their potential rewards are under attack too.”

“People will try to offshore or sell up to get ahead of such a change. They are already taking tax advice on how they might mitigate higher capital gains tax should this go ahead.”

The OTS said the alignment of capital gains tax and income tax would end a disparity that “creates an incentive for taxpayers to arrange their affairs in ways that effectively re-characterise income as capital gains”.

It added that an incentive called business asset disposal relief — formerly known as entrepreneurs’ relief — was “mistargeted” and could be better aimed towards retiring business owners. The relief reduces cuts the capital gains tax payable on the disposal of qualifying assets to 10%. Following sustained criticism of the tax break, the lifetime limit for claiming the relief was reduced from £10 million to £1 million in March.

Mike Cherry, national chairman of the FSB, said that scrapping the relief would leave business owners “faced with the prospect of growing today only to massively increase your tax bill tomorrow”.

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