Labour should follow Gordon Brown in cutting capital gains tax

Congratulations to Rachel Reeves for making it clear that Labour does not have any plans to increase capital gains tax.

It was the new Labour Government which cut CGT in 1998 and went on to cut it more. Labour should commit not just to preserve the existing CGT rate but to cut it.

Ms. Reeves rightly observed that “there are people who have built up their own businesses who maybe at retirement want to sell that business. They may not have had huge income through their life if they've reinvested in their business, but this is their retirement pot of money."

Labour has a good track record on cutting CGT. In his first budget Gordon Brown announced that "for those who build businesses or stake their own hard-earned money in them, the long-term rate will be reduced even more from 40p to 10p in the pound - the lowest rate ever achieved."

Gordon Brown first reform in 1998 involved taper relief from CGT, so the amount of gain charged to tax would be reduced the longer an asset had been held. He described this as “a new structure of capital gains tax which will explicitly reward long-term investment, and which is based on a downward taper and lower tax rates”.

Full relief was available after 10 years, at which point the GCT rate for business assets was 10% and for non-business assets 24%. Retirement relief, which previously removed the requirement to pay CGT from those over 50 who sold their businesses on retirement, was phased out in favour of taper relief.

The then Financial Secretary to the Treasury, Dawn Primarolo, explained that “the taper relief, in contrast, is much simpler; it will apply to everyone, be more wide ranging and certain in its application and, most important, will encourage all those who run businesses to invest for the long term and expand their businesses.”

In the March 2000 budget the business asset taper was shortened fromten to four years, in the words of the pre-budget report to “to bring the timing of CGT incentives more into line with entrepreneurial investment patterns” and reducing the percentage thresholds for qualifying business asset shareholdings, “widening the scope of CGT incentives towards entrepreneurial investment.”

In June 2001 the Labour Government published a policy paper proposing a further reduction in the business asset taper:

“The UK’s CGT regime for business assets is now one of the most competitive in the world. However the Government believes it is now time to go further and ensure that our regime is among the most favourable to enterprise in the developed world. For disposals from next April, the Government will improve the CGT business assets taper so that the effective rate of tax for a higher rate taxpayer is reduced to 20 per cent after one year and 10 per cent after only two years.”

In the April 2002 Budget the Government reduced the minimum holding period for business assets to attract the maximum 75% taper from four years to two.

The then Economic Secretary to the Treasury Ruth Kelly, commented on the shorter two year taper:

“The change that we are making this year will specifically build on the success of earlier reforms and, inparticular, encourage investment in start-up and growing companies. For such companies, equity investments are a vital source of finance. However, venture capitalists and other early-stage investors frequently invest with a view to realising their capital in less than two years, so we have designed the taper specifically to take into account the natural mode of operation and interests of venture capitalists, and their investments in start-up businesses.”

In the budget in April 2008 the new Chancellor, Alastair Darling, announced a major reform of CGT, withdrawing taper relief and indexation relief and introducing a single flat rate of tax set at 18%, irrespective of the length of time the asset had been held. This involved a reduction in the 24% rate of CGT imposed on long-held non-business assets, but an increase in the 10% CGT rate on business assets held for more than 2 years to 18%. To compensate for the latter a new entrepreneur’s relief rate of 10% was introduced, up to a cumulative lifetime total of £1 million.

Labour succeeded from 1998 through reforms to CGT in giving Britain an internationally competitive CGT regime that greatly reduced the damage to enterprise caused by the earlier high rates.

Rachel Reeves stressed that Labour “want Britain to be the best place to start and grow a business." She should follow Gordon Brown's lead and recreate a competitive CGT taxation regime.

Although the current CGT rates of 20% and 28% don’t seem that far above Labour’s last rate of 18%, the inflation environment has changed significantly for the worse. For example the cost of goods and services has risen by 72% since April 2008, so if you sold a £100,000 asset today for £172,000 all of the taxed gain would actually be inflationary. Similarly, Rishi Sunak slashed entrepreneurs’ relief back to £1m. It would need to be £1.7m to match the level set by Labour in 2008.

For Labour to make Britain the “best place to startand grow a business” the least it can do is to make our capital gains regime as competitive as it was when in last left office.