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  1. Law
August 4, 2010

Capital Offences

By Spear's

Messing around with capital gains tax helps no-one, says Caroline Garnham. To raise more money, lower taxes
CAPITAL GAINS TAX raised only £2.47 billion this year compared to £7.8 billion last year, and inheritance tax raised only £2.39 billion; whereas income tax raised an estimated £144 billion. So why is it that Gordon Brown was so obsessive over the past few years in stamping out avoidance of these capital taxes, to such a point that it is now unworkable, over-complex, uncertain and arbitrary?

Take inheritance tax. In 2004, Brown introduced an income tax charge as a way to stop what he believed was a scheme to avoid inheritance tax on your home, commonly known as the Double Trust Scheme. It introduced an income tax charge on any benefit a taxpayer may have retained in a formerly owned capital asset.

For example, if you owned a home and gave it to your son and subsequently lived there yourself, you would be charged income tax on the benefit of living in your former home. This was heralded by all capital tax practitioners as unworkable and draconian.

In 2006, Brown overhauled the inheritance tax treatment of trusts, such that if you wanted to provide for your children through a trust you would have to pay an immediate 20 per cent charge on the value of the assets you put into trust, but if you gave those assets to your children outright for them to squander and spend as they chose, you would pay no tax at all. This was met with disbelief from capital tax practitioners — after all, why should a responsible attitude to the preservation of wealth be treated with a tax charge?

In 2008, Brown turned his attention to the non-UK-domiciled UK resident community. He not only introduced a £30,000 tax levy on all those who wished to take advantage of the tax reliefs for the non-UK-domiciled community, but also made numerous changes to the rules on remittance to prevent the conversion of income into non-taxable gain, making the system overly complex, uncertain and arbitrary.

These changes, coupled with the requirement to claim non-UK-domiciled status, has led to the threat to many that their wealth offshore will be investigated by HMRC and disclosed to other jurisdictions, many of which do not have such a trustworthy system of law and enforcement as the UK.

Adam Smith in his book The Wealth of Nations, set out four maxims in regard to taxation. I would suggest, given the complexity of our capital tax regime, that it is close to breaking three of them — that tax should be certain, levied in a manner which is convenient for the taxpayer to pay it, and not expensive to administer. But to introduce such complexity and insensitivity into the capital tax regime shows a lack of understanding that capital taxation is (until death) largely voluntary.
THIS DOES NOT mean that the ultra-high-net-worth community can pay clever capital tax practitioners large fees to find loopholes which the prospective taxpayer can use to his advantage; rather, the taxpayer does nothing — glorious inactivity. If you have an asset, for example a second home, or an investment and you consider the tax rate too high, unless you have to sell, or the sale price is above the market rate and compensates for the higher tax, you simply do not sell.

Similarly, if you have young children and you are in good health, although you do not want your children to inherit your money outright, you will not set up a trust if to do so would result in a tax charge of 20 per cent. Again, if you own a private company which is making a profit and you do not need the money, you take out what you need and pay the higher tax rate on that, but leave the rest in the company.

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The complexity and levy on UK-resident non-domiciled persons means that some will go back to their home country, and others who would have come to this country will now not. Not only will the Treasury lose out on the revenue, it will also lose out on the VAT these people spend in our shops while they are here, which is also an important source of revenue for our Treasury.

With a disincentive to transactions and a disincentive to the wealthy coming to this country, the economy will inevitably slow down, and with it the revenue for the government. It is hardly surprising that the capital gains tax take has fallen so much. Although it may be politically unacceptable to lower taxes at a time when all are agreed that we must tackle this deficit, because most have no concept of how high taxes affect decisions and transactions, someone must, in the interests of all, stand up for the interests of the ultra-high-net-worth community.

To tax them at a level above that with which they are comfortable will raise less tax, not more, despite more than a decade of Gordon Brown doing what he can to tackle capital taxation avoidance through harsh anti-avoidance legislation.

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