No-one doubts that these are challenging times for those charged with management of the economy. We are proceeding reluctantly into a period of uncomfortable uncertainty but we need more from our government than excuses in advance of their potential inadequacy.We know that the deficit cannot be reduced substantially through the reduction of government spending alone and that tax rises are inevitable. But even this combination will be inadequate without economic growth.
We’re told that economies that invest in innovation, such as the US and China, are those that will succeed. So why does the government intend to suppress demand by increasing VAT, a move it has refused to rule out, or to increase capital gains tax, a measure it intends to impose?
The former dampens current demand while the latter suppresses investment.
An increase in CGT to the level of income tax may deter the minority who are able to convert income into capital gain but these tend not to be owner managers and those contemplating investment in SMEs. For them, such action is a major disincentive.
If the suggested CGT increase is enacted then the financial reward for a given risk will be reduced overnight and, as a consequence, entrepreneurs will concentrate more on the tax structure of their investment and less on its intrinsic economic value – to the detriment of overall economic growth.
Additionally, an industry will be created in tax advisers proposing new innovative ways to minimise CGT liability.
CGT will, like IHT, become a tax on the unsophisticated or financially indolent. Big companies and private equity funds will find ways around the tax, leaving SMEs to carry the burden.
Just when we need to incentivise the engine of the economy to deliver, its potential investors are penalised for investing.
If you intended to use the capital value of your business as a pension fund, you may in fact be better not investing in new assets but maximising your pension contributions or moving your shares into your fund.
If you are thinking of selling perhaps you should divide your business into pieces and sell only those elements to which you can attribute the highest base value and hence the smallest gain. Retain the other pieces such as factories or machinery and lease them to the purchaser.
Undoubtedly, you will need good advice on how to navigate the conditions and exclusions. And there will be many. If you can retain your investment for the medium term, think about moving overseas for a while to a better tax regime. Above all, don’t let the idea of higher CGT discourage you from investing, just do it in a smart way. At some point, the government will exhale an equivalent volume of rhetoric about how it intends to stimulate investment by reducing CGT rates.
Create today the problem that you intend to rectify tomorrow may seem to be clever politics but, in the real economy, this kind of fiscal gesturing is irritating in its naïveté. Picture source
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