Executive Summary:

  • When applied to investments in company shares, capital gains tax is generally a double tax because it taxes anticipated profits and retained profits that are taxed elsewhere in the system. It should therefore be abolished. Where investments are designed to hide income as capital gains, income tax should be charged on investment returns as already happens in some cases. Capital gains tax raises relatively little revenue and, as a tax on transactions is highly distortive.

  • If capital gains tax is not abolished, price indexation allowance should be re-introduced so that investors are not taxed on illusory gains.  The government should reconsider the future of inheritance tax. The UK is an outlier in charging a tax on estates at death and at such a high rate. Taxpayers go to great lengths to avoid paying it. Taxes on estates are a form of double taxation (on income accumulated as savings and passed on at death) and favour consumption over investment.

  • One option would be to follow the example of a number of developed countries and abolish the tax altogether.

  • Alternatively, it could be reasoned that people who inherit money or are given large gifts should be taxed on the income they receive from gifts and estates in a similar way to how they are taxed on other forms of income. The government could move to a system that taxes large gifts at a rate closer to 20 per cent over a lifetime taxfree limit. Countries that retain taxes on transfers of capital use such a model. This would reduce the burden on estates that are widely disbursed and, with a lower rate of tax, reduce the incentives for avoidance.

  • Land and property taxes in the UK are high but extraordinarily inefficient. In particular, stamp duty, as a tax on transactions, reduces labour mobility and also makes it more expensive for people to downsize or move home for other reasons. Council tax is regressive in many respects and business rates act as a disincentive to investment in business property.

  • There are now approximately ten different sets of rules of stamp duty depending on the value of the property; how it is owned; and whether it is a second property owned by a married couple or by an individual (a situation which discriminates against married couples). There are eight different rates of duty, again depending on the nature of ownership. Just 20 years ago, there were two rates (one being zero) and one set of rules.

  • The government should abolish stamp duty, council tax and business rates and replace them with property taxes that are much less economically harmful. Such changes could easily be phased in over five or ten years.

  • Changes to these three groups of taxes would considerably simplify the tax system and make taxes more economically efficient. The changes would be largely self-contained. The proposals would represent a radical reform of, and a huge improvement to the UK tax system.

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Philip Booth is professor of finance, public policy and ethics at St Mary’s University, Twickenham and senior academic fellow at the Institute of Economic Affairs. Philip was formerly the IEA's Academic and Research Director between 2002-2016.