Market leading insight for tax experts
View online issue

Views on the Liberal Democrats’ proposals

printer Mail

Would they really raise £27bn? 

The Liberal Democrats are proposing a package of tax rises that they claim will raise £27bn in 2028/29. These may look politically attractive: a large sum raised without directly raising taxes on ‘ordinary people’. But taxes on banks, for example, would need to be raised to new highs – much higher than under the Conservatives – to achieve the planned revenue, and would ultimately be felt at least in part by their customers. While there are some changes to be welcomed – their proposed capital gains tax reform looks to be in a sensible direction – at least some of the measures are a bad idea economically. 

Most notably, there is no economic rationale for a tax on share buybacks. It would distort companies’ financing decisions and further discourage the use of equity finance relative to debt finance. 

As to whether the package overall would raise £27bn, the risks are on the downside. For example, it may turn out to be difficult to raise £7bn from cracking down on evasion and avoidance. Less would be raised from taxing share buybacks if firms change their financing strategies more than the Liberal Democrats expect. Taxing frequent flyers more heavily would require an entirely new administrative mechanism to monitor how many flights people have taken in a year. And it’s worth noting that expanding the windfall tax on oil and gas profits would only bring in revenue as a one-off – not the permanent revenue stream needed to fund permanent spending commitments.

Paul Johnson, IFS Director

The Lib Dems’ CGT proposals: sensible but there’s a problem

‘Fairly reform Capital Gains Tax: Close loopholes exploited by the super-wealthy by adjusting the rates and basing them solely on capital gains while increasing the tax-free allowance from £3,000 to £5,000, on top of a new tax-free allowance for inflation, and introducing a relief for small businesses.’

That’s not very specific, but their press release (not publicly available) said: ‘New rate of 40% for gains of between £50,000 to £100,000, and 45% for gains of over £100,000.’

The Lib Dems say this will raise £5.2bn, but there’s no breakdown on the additional revenues from increasing the rate, the lost revenue from indexation allowance/reliefs and the cost of increasing the allowance.

There is a good argument for raising CGT. Having so great a gap between income and capital gains enables avoidance, as people flip what would otherwise be income (taxed at 39.35% or even 47%) into capital gains (usually taxed at 20%). There is also a good argument for reintroducing an allowance for inflation.

But there is a significant, albeit rather unfair, problem with this proposal.

On 15 March 1988, Nigel Lawson announced he would increase the rate of CGT to 40% and introduce an indexation allowance. That was, I think, a good idea. However the new rate applied from 6 April 1988. In the intervening three weeks we saw a lot of share sales, as people crystallised their historic gains under the 30% rate whilst they still could. That resulted in a significant increase in CGT revenues before the change came in, and a significant decline afterwards. Taking both factors into account, in the next five years following the announcement, the rate increase raised no additional revenue.

If the Lib Dems win the election (or form part of a coalition), then the Budget would likely be in the following Autumn. People would have rather longer than two weeks to crystallise gains. We could expect to see a similar, or larger, effect again (particularly with shares).

I expect it’s for these reasons that HMRC’s figures on the amounts raised by increasing the CGT rate are very low – indeed their figure for raising the higher 28% rate (homes and carried interest) by 10% is negative.

The Lib Dem plan is, broadly speaking, to raise the lower rate by 20% and the higher rate by an average of 15%. HMRC’s figures suggests that doesn’t raise the £5.2bn of revenue projected by the Lib Dems.

All in all, the consequence of applying HMRC’s figures to the Lib Dem proposals isn’t £5.2bn of revenue: it’s about a £3bn loss in 2026/27. And will be worse than that once you factor in the cost of the new reliefs the Lib Dems are proposing – inflation relief plus an increased annual exempt amount.

So the rather unfortunate result is that if you are a politician who wants to raise revenues by putting up CGT, you shouldn’t tell anyone about it in advance. That’s not great in the context of an election campaign.

Dan Neidle, Tax Policy Associates
Issue: 1668
Categories: In brief