Finance Bill

Clause 2 and schedule 1 introduce the changes to capital gains tax from 23 June 2010, as we have heard. The coalition agreement involved a commitment by the Government to align capital gains tax to levels similar or close to those applied to income, while providing generous exemptions for entrepreneurial business activity. Within the Treasury team, we looked at various options as to how best to achieve that. The conclusion we reached, however, was that contained in the schedule. For individuals, the rate remains 18% when their income and gains for the tax year do not exceed their income tax basic rate band. Above that level, the rate is increased to 28%. Therefore, someone who is already paying income tax at the 40% or 50% rates will pay 28% on all their gains. As was mentioned in an earlier debate, the 28% rate applies to trustees and personal representatives, who will pay capital gains tax at that rate on all their gains. That ensures that trusts are not used to shelter personal gains from the higher rate of capital gains tax. The changes come into effect from 23 June 2010, which, as the right hon. Member for East Ham (Stephen Timms) astutely notes, is part way through the tax year 2010-11. Gains chargeable in the earlier part of that year are still liable to CGT at the old 18% rate. As he pointed out, we did that to avoid forestalling and transactions being brought forward before the end of the tax year in such a way as to distort activity. We saw that after the announcement in October 2007 of a reform in the way capital gains tax worked. The disruption within the economy and distortive effect result in the economy becoming less efficient as a consequence of the tax system. We did not go down the routes that were advocated for taper relief or indexation, which would have been difficult to implement immediately. We believe that the simple approach we adopted was the right one. The right hon. Member for East Ham raised the concerns of some professional groups that the transitional provisions are not fully adequate. We do not accept that. A number of capital gains tax rules do not specify the exact time at which a gain arises, but they do not create difficulties in relation to the change of rate in June 2010. In such cases the facts will determine whether the gain arose before or after 23 June 2010. Exactly the same question could arise in determining whether a gain arises in one tax year or the next. That question normally causes no difficulty, and there is no justification for special provisions for 2010-11. The right hon. Gentleman and my hon. Friend the Member for St Ives (Andrew George), whom I thank for his kind remarks, raised the key issue of why a rate of 28% was chosen. As the right hon. Gentleman suggested, the answer is that it is close to the revenue-maximising point, as several of my right hon. and hon. Friends have said in recent weeks. There was some discussion about the methodology and how we worked that out, and the right hon. Gentleman requested that we put a copy in the Library. At the time of the Budget, we produced policy costings, which set out in greater detail than ever before how these matters are worked out. I advise him to look at pages 26 and 27 of the document in particular. For the benefit of the House, however, I will comment briefly on the thinking involved. We start with a static costing for the additional tax that would be raised as a consequence of raising the CGT rate. Two post-behavioural factors then need to be taken into account. The first is the increase in the lock-in effect. As was suggested by my hon. Friend the Member for Wolverhampton South West (Paul Uppal), fewer gains will be realised if a CGT rate goes up. That finding is based on extensive research, including research in the United States. According to the Treasury's assessment—based on the evidence of a considerable number of studies—""a 1 percentage point increase in the CGT rate would reduce gains realised in the UK on average by 2.75 per cent. As a result, the 10 percentage points increase in the CGT rate for higher rate taxpayers is estimated to reduce their gains realised by 27.5 per cent. It is assumed that this reduces the pre-behavioural yield"—" of £925 million—""by around £800 million in 2011-12… over the period."" The second behavioural impact involves the movement from income to capital. That was raised by several Members. It was also very much behind the thinking in the Liberal Democrat manifesto, which raised the perfectly fair point that the size of the differential was such that it would result in a behavioural change, whether it be tax avoidance or tax planning. The Treasury has concluded that for every 1% reduction in the gap between the CGT rate and the higher rate of income tax, there is an increase in income tax yield of about £60 million. That increases the 2011-12 income tax yield by £600 million. I think that that answers explicitly one of the questions asked by the shadow Minister. The ultimate Exchequer impact of those two changes is that £725 million will be raised in 2011-12. I know that the Members are anxious to hear me produce the same analysis of the figures for 2012-13, 2013-14 and 2014-15, but I am afraid that they will just have to have a look at the costings, which are available.