Dear George: take the US route on CGT

Currently, two investment causes exercise me: the widespread campaign against the threatened capital gains tax increase and, secondly, my own efforts to enable Alternative Investment Market (Aim) shares to be eligible for individual savings accounts (Isas).

On the former, I wrote to the chancellor of the exchequer on May 17.

Here is my letter:

Dear George,

Coalition agreement to raise capital gains tax (CGT) on non-business assets to rates “similar or close to those applied to income” has clearly caused considerable concern amongst investors – and has been the subject of much discussion in the financial press. Not least has been uncertainty as to the timing of a new GCT regime, leading some investors and advisors to the view that early crystallisation of profits on assets pregnant with gain was probably advantageous.

During my 50-year investing life, I have lived through a whole range of CGT rates and reliefs and (sadly or fortunately!) have paid CGT on many occasions. Endeavouring to strike an effective balance between fairness, tax- raising, and the encouragement of long-term savings and entrepreneurial investment is not easy, but I am firmly of the view that a differentiation between “short” and “long-term” gains is the answer – and is, I believe, the American approach.

Of course, there will always be clever scheme-devisers who find a way around any legislation for the few. But, for the vast majority of taxpayers, provided they believe CGT rates to be fair and reasonable, profits – and hence tax revenues – will be realised. Penal rates will discourage investment, postpone sales perhaps indefinitely and, in the case of corporate takeovers, result in investors accepting “paper” ie shares, loan stock etc rather than cash, thus deferring CGT liability.

As a consequence, tax revenues would likely be materially smaller than initially projected.

My conclusion is that non–business assets sold within three years of acquisition (yes – three years, rather than one) should be classed as short-term transactions, added to other income, and thus taxed at an individual’s top rate. However, long-term gains – three years or more – should be taxed at a flat 25 per cent rate – up from the present 18 per cent. In addition, the current CGT allowance or similar – currently £10,100 – should be retained both for the exclusion of relatively small gains and the ease of administration.

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On the latter cause, I am now following up on my original questioning of Lord Myners, and the 2010 (March) Budget Statement, about Aim shares being eligible as a tax advantaged investment.

I have the first Oral Question in the House of Lords on June 9: “To ask HMG what progress they are making in considering whether shares quoted on Aim should be eligible for Isas”. I declare an interest as a holder of shares in 16 Aim companies. As I pointed out in my earlier question, to allow in shares quoted on the Channel Islands stock exchange but exclude Aim shares seems bizarre.

The London Stock Exchange is supportive and, from the Treasury’s perspective, it would appear a tax-neutral way of boosting Aim investment.

John Lee is an active private investor writing about his own investments. He may have a financial interest in any of the companies and trading strategies mentioned.