IFS backs death tax on ‘flawed’ capital gains to boost growth
The “whole design of capital gains tax is flawed,” the Institute for Fiscal Studies has claimed, advocating for a complete overhaul of the tax rather than simply raising it.
The influential think tank has advocated for scrapping the tax break of capital gains at death today, arguing that it creates a large incentive for people to “hold on to assets well past the point at which it is efficient for them to do so”, as well as being “unfair”.
The change could bring in £1.5bn for the British economy, and would push people to better allocate their cash rather than holding on until death.
Capital gains tax only brings in less than two per cent of total tax revenue (about £15bn), but the IFS argued the current structure is creating negative incentives that are damaging the whole economy.
“The design of the tax base reduces UK productivity and growth by discouraging saving, investment and risk-taking and leading to a misallocation of capital away from its most productive use,” it said.
Chancellor Rachel Reeves is rumoured to be considering upping the rate to match income tax in this month’s budget, which could bring in an extra £2bn for the government.
However, the IFS warned that simply upping the rate would cause the problems created by the already broken system to become “significantly worse”.
“If the Chancellor chooses to raise capital gains tax rates while leaving the flawed tax base unchanged, she would be choosing to raise some, limited, revenue at the expense of weakening saving and investment incentives and further distorting which assets people buy and how long they hold them for,” said Helen Miller, deputy director at the Institute for Fiscal Studies.
Beyond instituting the tax after death, changes advocated for by the think tank included removing business asset disposal relief, which is a preferential capital gains rate for business owner-managers, that also costs the government £1.5bn a year.
The IFS said the system was “not well targeted at entrepreneurship and creates a range of undesirable distortions,” and the government should remove it while giving more generous deductions for investment costs instead.
“Giving full deductions for amounts saved or invested would cost revenue – but this could be more than offset by increasing rates so they are better aligned with the rates levied on income,” the think tank said.
It also advocated tax people emigrating from the UK on their accrued but unrealised gains, whilst exempting new arrivals from UK capital gains tax on cash they made whilst living abroad.
“This would raise practical challenges and the design issues would have to be carefully considered, but the approach is already operated by some other countries,” the think tank said.
“The new Chancellor should use her first Budget to create a capital gains tax that is fairer and more growth-friendly,” added Miller.
“The only way to do this is to reform the tax base alongside increasing tax rates. Getting the design of any reform right is crucial.”