Sunak’s war on wealth risks undoing 50 years’ progress

Business leaders fear that entrepreneurial spirit will be killed off in an attempt to fill the £50bn hole in public finances, writes Tom Rees

When Jeremy Hunt looks down the list of options for raising revenue in the Autumn Statement, many theoretical options will already be crossed out in red ink.

Department budgets and welfare payments can only be squeezed so far before risking revolt on the back benches. Corporation tax is already set to rise from 19pc to 25pc from next April – a further increase looks unfeasible. And the big three revenue generators of income tax, National Insurance and VAT are already off the table if the Government wants to keep to its manifesto pledges.

The situation leaves the Chancellor looking at a hodgepodge of smaller tax changes to fill the £50bn hole in the public finances. But, critics say, he has alighted on a solution that will reverse a 50-year march towards democratic capitalism and harm efforts by legions of middle-class voters to build a future for themselves through investment in shares and property.

The latest proposal under examination by Treasury officials is an increase in capital gains tax (CGT), the levy put on profits made from selling assets such as stocks or second homes. Whitehall sources say changes to CGT reliefs and allowances are most likely, but an increase in the headline rate is also on the table as Hunt turns to those with the “broadest shoulders” to bear the most financial weight.

Taking action would represent a sharp break with decades of efforts to foster a spirit of entrepreneurship in Britain.

CGT was initially typically paid at a rate of 30pc after its introduction in 1965, with allowances introduced in the 1970s to encourage investment in shares and property.

It was aligned with income tax by Nigel Lawson in 1988, further reducing the burden on basic rate payers, before being reformed again by Gordon Brown in 2008 when he changed the rate to 18pc and introduced a new relief for entrepreneurial risk takers.

All this tinkering paid off. In 1983, there were 2.4m self-employed people, but this has now risen to 4.1m. The number of small businesses has climbed from 3.4m to 5.5m since 2000.

Private rental stock has jumped from about 2m properties in 2000 to more than 4m today. And 9.4m people are retail investors.

Some of these trends have already started to reverse. For example, many landlords are selling up in the wake of repeated tax raids and self-employed numbers suffered during Covid.

But major changes to CGT risk turning a downward trend into a nosedive.

While increasing the tax may be tempting for the Chancellor, Rishi Sunak and Hunt risk setting back business owners, savers and landlords by decades if they target CGT to make the sums add up. Any changes may also prove less effective than the Government hopes in raising money.

CGT has long been in Sunak’s sights. Only months after becoming chancellor in 2020, he looked into a major shake-up of the tax after the Covid borrowing binge. He ordered the Office of Tax Simplification (OTS) to look into an overhaul, with the official tax adviser ultimately urging him to bring CGT rates in line with income tax.

The OTS said this change could “theoretically” raise £14bn alone, close to the £15bn the Exchequer is expected to generate from CGT in 2022-23. However, it admitted that, in practice, the taxman would fall well short.

Thomas Pugh, UK economist at accountancy firm RSM, says: “The risk is that you put it up too high and you incentivise people to essentially tax manage the liability out of it so you don’t end up raising much money.”

Critics argue that aligning capital gains and income taxes would be fairer, meaning money made from wages and investments are taxed equally. But business leaders and tax experts say major changes could impact entrepreneurship and fail to raise as much as hoped.

Craig Beaumont, chief of external affairs at the Federation of Small Businesses (FSB), says: “As they aren’t employees, many small business owners set themselves up to sell their business to support their later life.

“Changing the rules on this now would undermine thousands of people’s retirement plans and see a lot of them exit quickly.”

Doug Mcwilliams, deputy chairman of the Centre for Economics and Business Research, says even small CGT tweaks, such as scrapping entrepreneurs’ relief, will deal a blow to business owners. He says: “It will kill the entrepreneurial business model over time as there are so many other places where you can be entrepreneurial and entrepreneurs are amazingly footloose.”

Just announcing a future change in rates can cause a stampede to the exit, as happened with stamp duty, or stop activity altogether. CGT is a tax that the person bearing it decides when to pay by timing the sale of their investment or buying a house.

Chris Sanger, head of tax policy at EY, says: “Capital gains is a tax that people pay when they make a disposal, and actually they’ll defer their disposals. If you’ve got a large disposal, it might be somebody who could be going abroad and would make that disposal when they’re outside of the UK tax net.”

Announcing a rise in CGT for next April would risk causing a fire sale of assets as people try to avoid being charged at the higher rate.

It can be changed overnight, however. In his 2010 Budget, George Osborne created a new 28pc rate for higher rate taxpayers.

However, a fire sale of investments could actually be to the benefit of the Chancellor. Sanger says: “What you may see is people triggering gains ahead of the increase in CGT, which might be exactly what the Government wants because then it’s getting the money in right now.”

Hunt could still make a big difference by just tweaking or scrapping reliefs and allowances rather than putting up the rates. The Resolution Foundation estimates that people can receive more than £35,000 a year tax-free from the various reliefs on income tax and capital gains tax.

As the Chancellor seeks to fill the hole in the finances, business leaders fear he risks damaging Britain’s entrepreneurial spirit to little gain.

‘Changing the rules on this now would undermine thousands of people’s retirement plans’