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Tory peer Flight calls for capital gains tax cut

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A Conservative peer has urged the coalition to cut capital gains tax (CGT), arguing it discourages savings and investment and damages growth.

In a paper issued by the Centre for Policy Studies, Lord Howard Flight said there is “no excuse” not to cut CGT immediately to about 25% from its current level of 28%, adding a deeper cut to 15% would “clearly make economic sense”.

Co-written by Oliver Latham, an Oxford political economics PhD student, the paper sets out how even the Treasury’s own analysis shows that, once the 45p top rate of income tax comes into effect next year, the 28% rate will raise less revenue than a lower rate.

Lord Flight, the former chairman of Investec who co-founded Guinness Flight in the 80’s before it was taken over by the South African asset management giant, said: “This is a ridiculous situation, and one which should be addressed immediately. There is simply no excuse for the Chancellor not to cut CGT in the Autumn Statement.

“This paper provides overwhelming evidence from both the UK and overseas that higher rates of CGT are damaging to growth because of the damage it does to resource allocation and competitiveness; to entrepreneurship and to business efficiency.”

Among the other points made in the paper is that the current rate drives funds into tax-exempt assets, rather that those which deliver high returns.

It also explained how CGT discourages entrepreneurship by incentivising business owners to continue managing their enterprises once they become established, rather than selling them and moving on to another project.

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The authors of the paper set out three main options for a reform of the system:

Option 1 – Abolish CGT altogether, potentially leading to about £4bn in lost revenue. The Treasury could lose even more revenues as income tax receipts would fall due to the increased incentive to reclassify income as gains. However, increased entrepreneurship could lead to higher revenues from corporation tax and higher employment participation rates.

Option 2 – Return CGT to the 18% flat rate regime, costing the Treasury about £900m under pessimistic assumptions. However, the authors believe the true cost is likely to be substantially lower, and the possibility it could increase revenue should not be ruled out.

Option 3 – Augment the current system with taper relief for assets that have been held for a longer period of time. For example, the rate of CGT could be reduced to 18% for assets held for more than two years. This would mitigate some of the worst distortions of high CGT rates while minimising the incentive for tax avoidance. The distortions in asset markets, due to individuals being encouraged to hold onto assets in order to obtain better tax treatment, could be offset by the benefit of making it more difficult for individuals to avoid income tax by reclassifying their income as gains.

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