Capital gains tax should increase to help close deficit and end tax dodging

Capital gains tax (CGT) is used by rich people to avoid paying their proper share of tax and if the Chancellor believes that 'we are all in this together' he should increase both the rate and coverage of CGT, according to a new report published by the TUC today (Monday).

Because CGT is levied at 18 per cent and the highest rate of income tax is now 50 per cent, there is a huge incentive for people to use accountancy tricks to turn income into a capital gain, the report says.

The report - available at www.tuc.org.uk/CGT - references official figures which clearly show that CGT is the 'tax dodger's tax of choice':

33 per cent of all tax liable capital gains were held for less than a year.
As 60 per cent of all capital gains tax bills are paid by people with little or no income, and the poor do not have the wealth to purchase assets on which they can gain, the strong suspicion must be that assets are being transferred to non-earning spouses to take advantage of a second CGT allowance. It is quite reasonable therefore to think that half of all CGT bills are evidence of tax dodging.
Hedge fund and private equity managers are notorious for taking income as 'carried interest' on which they pay CGT - this is why they can pay less tax than their cleaners.
Capital Gains Tax is an 'honesty box' tax - the volume of trades in London shares suggest the CGT tax take should be significantly higher and that many capital gains go unreported to an understaffed HM Revenue and Customs (HMRC).

The TUC says that the Chancellor should increase CGT rates so that they are the same as income tax rates, and that the annual allowance for gains before tax is due should be cut from £10,100 to £2,000 a year as the Liberal Democrat manifesto proposed.

The Chancellor should also crack down on abuse of the exemption for business sales, says the report. While there is a good case for treating people disposing of a business they have built up over many years as a special case, the current low 10 per cent rate for the first million pounds gain on a business asset is abused by hedge funds and private equity.

There also needs to be a major anti-avoidance and evasion programme with more tax inspectors and new requirements to register asset sales. Capital gains on any asset held for less than two years should be taxed under income tax rules, says the report.

TUC General Secretary Brendan Barber said: 'The vast majority of taxpayers never come into contact with capital gains tax as they are simply not wealthy enough to buy and sell the assets that bring capital gains.

'But most will find it incomprehensible that they pay more tax on the wages they earn from putting in a full day's work than the wealthy do from sitting back and watching their assets increase in value.

'CGT is the tax dodger's tax of choice and is used by the wealthy to pay less tax than their servants. It's time to get tough with a crackdown on CGT loopholes and make far more effort to stop abuse. Employing more tax inspectors would more than pay for itself in new income.

'If the Chancellor is serious about us all being in this together, he should implement in full the Liberal Democrat proposals on CGT.'

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