Tom Maguire outlines why the Budget needs to look at reducing the rate of Capital Gains Tax has been saved
Tom Maguire outlines why the Budget needs to look at reducing the rate of Capital Gains Tax
Two more sleeps to Budget Day. I wrote about the Tax Strategy Group’s (TSG) paper that discussed certain tax implications for corporate financing costs in my last column. That paper was among the group’s recently published Budget 2021 papers which included one on Capital Gains Tax (CGT). The TSG is a think tank chaired by the Department of Finance whose website explains that the TSG “is not a decision making body and the papers produced are simply a list of options and issues to be considered in the Budgetary process”.
Regular readers of this column know my view that the rate of CGT should be reduced. Michael McDowell SC kindly wrote a foreword to my Capital Gains Tax (CGT) book and explained that when the Minister “in 2002 halved the 40% CGT rate and quintupled the yield on CGT, it became very clear that the rate of CGT hugely influenced its yield in a manner quite different from other forms of taxation”.
The TSG summarises the pros and cons of reducing the CGT rate. It notes that there is likely to be an immediate Exchequer impact with a reduced rate. It explains that while there may be an increase in Exchequer revenue from an increase in assets sold to take advantage of a lower CGT rate, there were doubts as to the potential level of additional yield this could raise and the sustainability over time. Additionally, the current economic environment may increase the uncertainty around any potential Exchequer impact. Okay, but look at the “here’s one we did earlier” that I mentioned above which quintupled the yield.
The report continues that a 5% CGT rate reduction in a single Budget would have an Exchequer impact of €162 million “assuming no behavioural change”. I’ve previously cited the John Maynard Keynes quote in these pages who may have said “when the facts change I change my mind, what do you do”. You can see his point. When the rate was reduced in the past there was a significant behavioural change leading to a positive Exchequer effect. The TSG’s report goes on to speak about levels of “potential deadweight” arising from reducing the CGT rate on the sale of assets, which would be sold irrespective of the rate of CGT. That would of course have to be balanced against any potential increase in yield.
In that regard the report explains that having a “time limited lower rate of CGT for a period of one year for some or all sales of assets subject to CGT may provide for a temporary stimulus”. Using the latter “s” word in “stimulus” in a government document is promising given where we are now economically. The report continues that such a move could encourage economic activity, allow for the disposal of potentially unproductive assets, which may arise because of the current crisis and could encourage sales and speed up the decision-making process. If someone was procrastinating on selling certain property then such a rate reduction should focus the mind.
The TSG goes on to differentiate where we are now from 2008. It uses the “s” word again saying that “if it is considered appropriate a temporary reduced rate, which applied to the sale of some or all assets, may have a stimulus effect in terms of the disposal of assets”. It’s positive to see the “s” word being used in terms of a reduction of a tax rate.
So if we go with the time-limited version then what happens when the clock strikes twelve ending the reduced rate period? Do we go back to the full CGT rate of 33% or do we do something else? The report outlines two other options bringing in a rate of a possible average of EU and UK rates (thereby bringing about a more competitive rate than we have now) or having a lower general rate with another higher rate for clearly defined assets. The TSG recognises the latter one would increase the administrative burden associated with CGT while offsetting any costs (and I’d add if there were any given what happened last time) of a permanently reduced rate. Of course, there is another possibility: Simply extend the lower rate period. i.e. if the appropriate stimulus occurs then just keep it going.
One of the arguments that the TSG outlines against a rate reduction is tax arbitration. This means that if income tax rates are high and CGT rates are low then as the TSG says “it may be possible to manage receipt of income so that it is taxed as capital rather than income tax”. Putting it another way, convert income into capital to get the lower tax rate. The TSG recognises that while it is possible to counter such outcomes via anti-avoidance legislation, “this can be difficult to introduce and administer and can add to the complexity of the tax system”.
If that’s a concern then Revenue always has the General Anti-Avoidance Rule (GAAR) to rely upon. Its purpose is that a tax advantage can be removed where it is “reasonable to consider” (that’s how it’s written – i.e. not “beyond a reasonable doubt” etc.) that something was done primarily to achieve a tax advantage.
My point here is that the reduced rate should be focused on stimulating the economy. That’s something that the TSG go on to explain in that a lower CGT rate “could potentially encourage innovation and risk taking, encourage the sale and purchase of assets, which drives investment activity, and would improve the returns for entrepreneurs”.
The TSG go on to say that it could be possible to offset the Exchequer cost of any change in the headline CGT rate (although see my “here’s one we did earlier” point above) through trade-offs in terms of restriction or abolition of certain CGT business reliefs. Au contraire mes amis, the reliefs were brought about for specific purposes and can reduce CGT liabilities. Restricting or abolishing such reliefs could reduce the number of disposals of assets and may negate the benefits that could flow from reducing the CGT rate in the first place.
Overall, a reduction in the rate of CGT seeks to stimulate the Jurassic economy. Look at what happened the last time we did that. And right now, we need “a little bit of history repeating”.
Please note this article first featured in the Business Post on 11 October 2020 and was re-published kindly with their permission on our website.