Hiking Capital Gains Tax is “incredibly unjust”, will “impede entrepreneurship” and damage the economy, say experts

The Coronavirus pandemic has hit millions of freelancers, contractors and small businesses hard, with many falling through the cracks of the government support. And with uncertainty around Brexit, upcoming IR35 reform and now the prospect of a hike to Capital Gains Tax, think tank the Centre of Policy Studies and campaign group BackinBusiness.org.uk have both urged the government to start supporting businesses or risk damaging the economy.

This is in response to a report published by the Office of Tax Simplification (OTS) last week, which recommended an overhaul of Capital Gains Tax (CGT). The report comes after Chancellor Rishi Sunak tasked the OTS in July to look into whether CGT is fit for purpose and if it could be simplified.

CGT is a levy on the profit of an asset sold which has increased in value. The amount gained is taxed rather than the money received.

Relief for stimulating business investment is “mistargeted”

Among the recommendations in the OTS report is for the rate of CGT to be aligned with Income Tax. It would mean higher earners could see a big hike in their taxes while basic rate taxpayers may only experience a small increase.

The move would see the tax rate on investments such as shares and investment funds double from 20 per cent to 40 per cent for higher rate taxpayers, and from 10 per cent to 20 per cent for basic rate taxpayers.

As part of its package of suggested reforms, the OTS has also advised scrapping the Business Asset Disposal relief, which used to be known as Entrepreneur’s Relief. This tax relief means business owners pay less CGT when disposing or selling all or parts of their company. 

Bill Dodwell, tax director at the OTS said this relief is “mistargeted” and ineffective, and therefore the government should replace it with a “relief more focused on retirement”. He has also called for the investor’s relief to be abolished.

Other recommendations on the table include lowering the CGT qualifying threshold from £12,300 to as low as £2,000, and ending the death ‘uplift’ – currently, anyone who inherits an asset does not have to pay CGT if they sell it.

Tax overhaul would raise £14bn for Treasury

The OTS’s recommendations on CGT would see a surge in the number of people liable to pay this tax, which could raise around £14billion for the Treasury. But experts warn that hiking CGT would not only hit small businesses and freelancers hard, but potentially damage an already battered economy.

Liz Barclay, CEO at BackinBusiness.org.uk, said: “Now is not the time to hit small businesses with higher taxes. The proposed overhaul of the Capital Gains Tax will deter investment and businesses from investing in growth and desperately needed job creation.  

“Many businesses have been hit hard by the pandemic, the uncertainty around Brexit and the looming IR35 and digital tax reforms. It seems the Government is unfairly targeting this group time and again.”

UK’s tax system must “attract investment and growth”

Barclay added: “Many self-employed have received very little financial support during this crisis and it is incredibly unjust to make them pay for it by hiking taxes in any form. We should not be stifling businesses. We must stimulate innovation.”

Robert Colvile, director of the think tank, Centre for Policy Studies, echoed Barclay’s concerns. He added: “Raising CGT will discourage people from starting businesses, make it harder for start-ups to scale, impede entrepreneurship and damage economic dynamism and national prosperity just at the time we need it most.

“Instead, the government should look at reforming the UK’s tax system to attract investment and growth, without which there can be no sustainable economic recovery.”