Tory Opposition To UK CGT Rise Grows

by Robert Lee, Tax-News.com, London

27 May 2010

UK Conservative backbencher John Redwood claims that he has been "swamped with support" from his colleagues for his proposals to mitigate the impact of rising capital gains tax (CGT) rates.

The Conservative/Liberal coalition has agreed to realign the CGT rate, currently 18%, with income taxes, possibly to as high as 50%, and more detail on these plans is expected in the forthcoming emergency budget. However, the proposals have caused much disquiet among some Conservative Members of Parliament, raising the possibility of an early rift in the coalition government.

In a letter to Treasury minister David Gauke, influential backbench MP Redwood, a former cabinet minister, wrote that while the government's need for additional revenues is understandable, such a drastic rise in CGT would be unfair on those who invest and take risks.

"I understand your wish to tax short term gains as income, to prevent conversion of income into capital and to ensure short term traders and speculators pay their fair share of tax," Redwood wrote. However, he added that: "The government needs a policy which allows reasonable freedom for people to invest, encourages those who are responsible and who make provision for their families and their futures, and is fair."

"I suggest that you tax gains of under one year as income. I would suggest you tax them at 40% for higher rate payers, as I understand the 50% rate is a temporary measure. Were you to use the 50% rate it would need to be clear that you intend to go back to 40% for both income and capital gains as soon as possible," Redwood's letter added.

Redwood proposes that longer-term capital gains are taxed at lower rates, so that gains realized after two years are taxed at 30%, gains realized after three years at 20% and gains realized after four years at 10%.

"I would myself go further and offer no capital gains after five years, to send a strong signal to the world’s investors that the UK is back in business as a favourable location," he wrote.

Redwood also argued that high rates of capital gains tax often lead to lower revenues for the government, citing previous capital gains tax hikes in the US as an example.

"I have been swamped with support for these suggestions, both from around the country and from Conservative MPs," Redwood stated.

"It would send a strange signal if a Lib/Con government decided to more than double the CGT rate set by a Labour government. It would damage the revenues and be unfair to anyone who saves, is prudent, or who ventures their money for the greater good," the letter concluded.

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