A think tank has urged the government to hike the rate of capital gains tax to match income tax levels in a bid to make the UK’s tax system fairer and increase government revenue.
Just Tax, a report from The Institute for Public Policy Research published today (September 9), estimated the government could raise an extra £90bn over the next five years by taxing capital gains at the same rate as income.
Capital gains tax is subject to different thresholds than income tax and is generally lower for higher earners.
The think tank also thought an additional £15bn could be raised over the same period by removing the exemption of capital gains upon death, which currently means a deceased’s estate is not liable for capital gains tax.
On top of the potential benefits of reform, the current capital gains causes economic inequality and is unfair, according to the IPPR.
The report claimed two people who earned the same amount of money but from different sources could make very different contributions in tax, and those on larger incomes from a mixture of sources could have a lower average tax rate than those on lower incomes who received their income solely through employment.
The IPPR stated this was “fundamentally unfair”, claiming it distorted economic behaviour and created opportunities for tax avoidance.
Alan Chan, director at IFA Wealth & Pensions, said the IPPR’s proposals would be a “poor move” which “sent out the wrong message”.
He said: “We want to encourage more people to save and invest. By increasing the tax rates, it would reduce the incentive for savers.
“Significantly hiking up capital gains or dividends taxes to the same rates as income tax rates would be disproportionate to the level of risk taken for the investor.”
Mr Chan added capital gains were not guaranteed, highlighting that investors took risks to get such returns and changes to the tax would make investing outside of any tax wrappers unattractive.
He also thought such proposals could hurt those heavily reliant on savings and investments, such as retirees.
The IPPR backed the taxing of all sources of income together and equally under a single tax schedule:
|Gross income||Net income post tax: current system||Net income post tax: IPPR system||Difference|
Sarah Coles, personal finance analyst at Hargreaves Lansdown, said the report underlined how tax allowances and rates could change overnight and she stressed the importance of wrapping savings and investments in Isa wrappers to protect money from tax regardless of policy change.
She added: “The think tank says its proposals are fairer than the current system. It underplays the fact that in reality, the vast majority of savers and investors pay tax on their income from work, they save and invest diligently for their future, and may pay a second round of tax on their investment income or gains.”
The think tank also proposed a fundamental reform of the income tax system, stating the current system of tax bands dated from the “pre-computer age” and was “no longer fit for purpose”.