It’s a Champagne Budget

It’s a champagne budget – or at least one to celebrate for investors as there are no really negative changes in it that were widely rumoured. At least that is apart from the rise in dividend taxes and freezing of allowances previously announced.

Here’s a list of the key points:

  • The National Living Wage is being increased.
  • The Government is substantially increasing funding for R&D.
  • The bank corporation tax surcharge is being reduced.
  • There will be some relief for business rates.
  • R&D tax relief will be focussed on domestic expenditure.
  • There will be more investment in tech skills and in schools.
  • Alcohol duties will be reformed and simplified with lower rates on lower alcohol products – champagne and beer will be cheaper.
  • Proposed rises in fuel duty are cancelled.
  • There will be minor changes to the taxation of REITs (details not yet clear but probably positive for investors) and there will be a levy on property developers to finance a fund to remove dangerous cladding.
  • The economy is now expected to grow by 6.5% this year (up from 4%) hence the generally positive tone of Rishi Sunak’s speech and new spending commitments.
  • Borrowing as a percentage of GDP is forecast to fall from 7.9% this year to 3.3% next, then 2.4%, 1.7%, 1.7% and 1.5% in the following years.


This is generally a sensible budget with no abrupt changes in taxation, which are always to be deplored.

The emphasis on more education spending is surely wise, and on the NHS of course although whether the extra money will be wisely used remains to be seen.

Cancelling the rise in fuel duty may please some car drivers but it does not seem consistent with the aim to reduce carbon emissions and certainly will not help reduce congestion on our roads. Is this a two fingered gesture to Insulate Britain protestors who were active again this morning? But more prisons are being build to hold them if the courts put them away for a stretch.

It does not look like there will be any big impacts on particular sectors. The share prices of REITs have risen this afternoon so the changes may be positive but the rise in the National Living Wage will hit large employers such as retail store chains. There may be some benefits to large banks in the reduction in the bank surcharge on corporation tax but that will be offset by the general rise in corporation tax previously announced.

The changes in alcohol duties are a welcome simplification and may be of some benefit to pubs while encouraging healthier drinking. But it might negatively impact wine and spirits producers.

The UK stock market has not reacted significantly to these announcements although gilt prices rose on anticipated reductions in Government borrowing.   

More details are present in this document:

Roger Lawson (Twitter:  )

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Good Articles in Investors’ Chronicle

There were several good articles in this week’s Investors’ Chronicle. I cover them briefly below.

The Editor, Rosie Carr, reported on feedback on readers’ views on taxation. Should the wealthy readers of the IC pay more was one question previously posed and the consensus answer seemed to be Yes. For pensioners it was suggested that they should pay National Insurance on their income and that there should be harmonisation of income and capital gains tax rates. It was also suggested that property taxes should be raised and Inheritance Tax raised.

I would support most of those suggestions but not the last. Inheritance Tax is typically a tax on created wealth which has already been taxed in one way or another. Double taxation on the same assets should be avoided in my view although perhaps some loopholes should be closed.

There was a good article by Chris Dillow on the problems created by the “decades-long attempts to cut inventories”. He points out that the adoption of “just-in-time” production methods had a positive impact as inventory is expensive. That is particularly so when debt is expensive and interest rates high. This of course is the result of MBAs like me being taught at business schools that cutting inventory was always a good thing. Now we find that the smallest hiccup in the supply chain such as transport delays proves to be very expensive.

There is a good analysis of the audit issues at Patisserie Valerie by Steve Clapham. He concludes that the sanctions imposed by the FRC “are woefully inadequate” which I also suggested in a previous blog post. I said Grant Thornton was “fined a trivial amount”.

The article does however suggest that there were some warning signs such as very high margins in comparison with other sector players, and high inventories in relation to the revenue. But there were reasonable explanations for the differences. One would have had to do a lot of research to figure out if there was really a problem or not. Clearly the auditors did not do that and most investors do not have the time nor resources to do such research. That’s why we rely on the audited accounts!

It is unfortunately the case that outright frauds can often be easily concealed but the audit in this case was clearly very defective and the published accounts of the company were grossly misleading.

But I do admit to failing to take my own prescription for avoiding problem companies – namely investing in a company with an Executive Chairman with too many jobs!

There is also a good article on “The flattery industry”, i.e. how management improve their reported profits by using “alternative” or “adjusted” measures. The FRC has published a report on this issue.

It is very clear that companies are addicted to alternative performance measures and that applies just as much to large companies as small ones. One company and its “adjustments” mentioned negatively in the article is GlaxoSmithKline (GSK). I sold a holding in GSK back in 2014 for that very reason – way too many adjustments in the accounts. The price of the shares then was about 1480p. It’s now 1407p. Clearly a good decision. Stockopedia currently says it qualifies for the Altman Z-Score Screen (Short Selling). Enough said I think.

But this is surely yet another example of where the FRC is falling down on its job. There should be regulation of what can be published as adjusted figures and there should be rules about how they are published. There should be consistency and not excessive emphasis on adjusted figures. At present we have a quagmire of data with no easy way to compare different companies.

Roger Lawson (Twitter:  )

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Raising Taxes Was Inevitable

The Prime Minister’s statement yesterday primarily provided an excuse to raise taxes to help the NHS and support social care funding. But this was surely very predictable. In March I said this after the Chancellor published his budget: “Reaction to yesterday’s budget was generally negative, but nobody likes higher taxes. The general view is that the Chancellor has just kicked the bucket down the road. More borrowing in the short term to finance the recovery and keep people in employment, but much higher taxes later. I think the budget is a reasonable attempt to keep the economy afloat and could have been a lot more damaging for business if he had taken a tougher line”.

You only have to consider the many billions of pounds being expended in the NHS to counter the Covid-19 epidemic and to support businesses which had to shut down to see that higher taxes were inevitable.

We are now getting the predicted higher taxes. The main points announced were:

  • National Insurance rates for both employees and employers will rise by 1.25%. Mr Johnson said he “accepts that this breaks a manifesto commitment, which is not something I do lightly. But a global pandemic was in no one’s manifesto”.
  • Those over 60 but still employed will also pay National Insurance for the first time from which they were previously exempt.
  • Taxes on dividends will also rise. Dividends are taxed based on your income tax rate. Basic-rate payers will now pay 8.75% tax on dividends, up from 7.5%, higher-rate payers will pay 33.75%, up from 32.5%, while top-rate payers will pay 39.35% up from 38.1%.
  • The “triple-lock” on state pensions will be suspended which will reduce the anticipated income rise for pensioners.
  • Pensioners will also be hit by a proposal to raise the limit for when obtain free prescriptions from age 60 to 66.
  • In total it is suggested that the total tax take will be the highest it has been since the Second World War and undermine the Conservatives claim to be a low tax party.

What do we get in return?

The extra £12 billion a year raised will mainly be spent helping the NHS recover from the Covid-19 pandemic and, eventually, on protecting people from extortionate social care costs. But there are few details on how the money will be spent. However there is a claim that the extra taxes raised will be hypothecated as a “health and social care levy”, i.e. cannot be spent on anything else, although the rules can be changed later of course.

One specific commitment is to introduce a lifetime social care cost limit of £86,000 per person from 2023. This may help people to avoid having to sell their homes if they have to go into residential care. But it only applies to basic care costs not to food and accommodation.

There will be a new means test if people live in their own homes. They will get all their social care funded by taxpayers if they have less than £20,000 in assets — excluding the value of their home. They will be partially funded if they have assets worth up to £100,000.


  • The advantages of the self-employed paying themselves via dividends rather than in salaries will be further reduced. For those who receive dividends on investments it is important to try and reduce those by moving the investments into tax free ISAs, SIPPs or VCTs. Clearly it will also increase the relative value of companies that are growing their retained profits or doing share buy-backs rather than paying out profits in dividends.
  • Will the extra money for the NHS actually improve the services? As a big personal user of the NHS I welcome it but will more money make a difference? The service has certainly declined in the last year with waiting lists for operations growing to millions nationwide (I had to pay privately to get one done for example). There is a shortage of doctors and nurses and that is not easy to fix quickly as training takes a long time as does building new hospital facilities. The total funding for the NHS is now comparable to other European countries but the level of service provided is not as good – just compare the number of hospital beds, particularly intensive care ones, or doctors per head of population. This is where the NHS proved to be so sub-standard during the pandemic. This is a management problem which more money might not cure.
  • Social care likewise needs wider reform but will more money help? It is not clear.
  • The media comments lauded the ability of those who need to go into care homes from avoiding selling their homes. But why should they not be forced to do so? This looks like a sop to the wealthy home owners in the shires who want to pass on their homes to offspring. I do not consider it fair that young workers should be subsidising such funding by rises in taxes on them. So far as I am concerned, I am quite happy to erode my personal wealth to pay for the medical or social care costs I need. My offspring should not be relying on collecting big inheritances.
  • Is it a good idea to impose extra costs on businesses and deter them from employing more people? This is surely a damper on economic activity generally and will reduce returns to investors. But employment levels are high and increasing the cost of employing people might encourage higher productivity. At this point in time, I therefore do not oppose it, but I am not one of those in employment who will be paying the higher NI rates.

The key question is what else could the Chancellor have done to raise taxes? The alternatives are probably no better.

Roger Lawson (Twitter:  )

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How Wealthy Americans Pay No Tax

There was another article in the Financial Times today covering “How the wealthiest Americans get away with paying no tax”. The item was based on a report by ProPublica which suggested that America’s richest billionaires paid virtually no taxes on hundreds of billions of dollars of added wealth over the past decade. They only paid 3.4% of the increase in taxes. The report is based on leaked IRS data.

One reason is because the US tax system is like the UK one in that there are numerous allowances that can be claimed, and although there are taxes on capital gains these are only payable on realised gains.

The article even went so far as to suggest that unrealised gains be taxed so as to make the system more equitable (a mark to market system) or that a wealth tax be introduced. These could ensure that the tax rates on wealthy people are more similar to those paid by the normal working population.

Is it really so different in the UK I am wondering? I now know how much tax I will pay for the last financial year (an exceptionally high one in terms of capital gains tax paid) and it’s only 6.3% of overall profits (capital growth plus dividends received last year).

With a lot of the gains and dividends being in ISAs, SIPPs and VCTs, this partly explains the relatively low tax. But it is also low because of avoiding realising capital profits unless absolutely necessary in direct holdings. I sell holdings showing a loss and retain those showing profits, i.e. running the winners and selling the losers which is always a good policy to follow on stock market investment.

Is such a low tax rate unprincipled? It’s partly low because I have responded to Government policy to encourage investment in early-stage companies but it’s also because of the structure of the tax system and taking sensible steps to avoid paying tax unnecessarily. Which is no doubt what the US billionaires are doing.

Should unrealised capital gains be taxed? This is a very doubtful proposition mainly because it means taxes in cash terms could be imposed on gains which have not been realised in cash. The losers from such a system would be those who simply did not have the cash to pay the tax demands. There is also the problem with any “mark to market” system that there may be no readily available market price for many assets (property for example).

Capital gains tax rates might be raised of course, and I have no objection in principle to the rates being more aligned with income tax rates, but that might simply mean that more people postpone realising capital gains. There may not be a great increase in the net tax receipts.

It is surely better to encourage capital gain realisations so that people have the resources to invest in new business ventures and so as to ensure a vibrant economy. If any realised gains are reinvested, why should they be taxed anyway? I have suggested before that we need a new capital gains tax system to take account of roll-overs from past investments where any profits may simply arise from inflation anyway.

Taxation policies should not be driven by the politics of envy which is essentially the theme of the FT article, but by a wider view of the economy and the incentives that taxes drive.   

Roger Lawson (Twitter:  )

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Capital Gains Tax Review – Is It Simplification?

The Office of Tax Simplification (OTS) have published a second report on Capital Gains Tax covering practical, administrative and technical issues. They give a number of recommendations to the Government and I cover those that may affect individual investors below (at least the few who actually pay capital gains tax) and add a few comments:

  • HMRC should integrate the different ways of reporting and paying Capital Gains Tax into the Single Customer Account, making it a central hub for reporting and storing Capital Gains Tax data (recommendation 1).
  • The government should consider whether Capital Gains Tax should be paid at the time the cash is received in situations where proceeds are deferred, such as on the sale of a business or land, while preserving eligibility to existing reliefs (recommendation 8). This is a sensible change.
  • The government should consider whether individuals holding the same share or unit in more than one portfolio should be treated as holding them in separate pools (recommendation 4). They say “This will relieve the relatively small number of individuals with more than one investment manager from having to perform calculations based on the interpretation of a complex range of financial statements and help to facilitate better use of third-party data”. But it could mean that losses in one portfolio could not be used to offset profits in another. This writer would not be in favour of such a change (I have multiple portfolios with different brokers for good reasons). Any such change should be made optional, although it might not make a lot of difference for most people in practice. However, with other recommendations included it might enable tax to be collected much sooner than at present. Is there a hidden agenda here? One can envisage that Pay as You Earn might become Pay as You Trade.
  • There are currently several different ways UK resident individuals report Capital Gains Tax transactions to HMRC. In some cases, this involves disposals being reported more than once. The most common way to report a disposal is through Self Assessment. The next most common way to report a gain is via the UK Property tax return. A very small minority of people choose to report gains early through the ‘real time’ Capital Gains Tax service. The proposed change is that the government should formalise the administrative arrangements for the ‘real time’ Capital Gains Tax service, effectively making it into a standalone Capital Gains Tax return that is usable by agents (recommendation 2).
  • The government should review the rules for enterprise investment schemes, with a view to ensuring that procedural or administrative issues do not prevent their practical operation (recommendation 10).
  • The government should consider whether gains or losses on foreign assets should be calculated in the relevant foreign currency and then converted into sterling (recommendation 11).
  • HMRC should improve their guidance in the following specific areas (recommendation 14) – A persistent theme running through many of the responses the OTS has received to the Call for Evidence is that many people have limited awareness or understanding of Capital Gains Tax, of when it may arise, or of their reporting and paying obligations where it does.

The report is 121 pages long, but simplification is complex is it not? There are some proposed changes that are certainly advantageous (such as the extension of time for divorcing couples to transfer assets), and no doubt there are others that are rational, but this is not a wholesale simplification of the system of Capital Gains Tax that is preferably required. It’s just tinkering with the complexity to removal a few anomalies.

The OTS report is available from here: . If you think you might be affected by these proposals it’s best to read the whole report.

Roger Lawson (Twitter:  )

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Chancellor’s Budget Speech – Positive for Business

I listened to Rishi Sunak’s budget speech today and here is a summary of some parts of it with some comments from me.

He said that £280 billion of support had been provided, but the damage to our economy despite this has been acute. However our response to the coronavirus epidemic is working. Employment support schemes are being extended and business rates holidays also. The OBR is now forecasting a swifter recovery but the economy won’t be back to normal until the middle of next year. Unemployment is expected to rise to 6.5% but that is less than previously forecast.

There will be another £65 billion of support for the economy when we have borrowed £355 billion this year which will be a record amount.

The stamp duty holiday is extended to September. That should please my oldest son as he is trying to move house at present and delays are happening in the chain because of local authorities not responding to inquiries. There will also be a new mortgage guarantee scheme which as Keir Starmer pointed out may simply encourage a rise in house prices – OK if you already have one but not otherwise. Fuel duty will be frozen as will beer, wine and spirit duties.

Now the bad news: personal allowance tax thresholds will be frozen at the end of the next tax year until April 2026. That effectively implies a rise in tax equivalent to inflation over that period. Inheritance tax thresholds will be maintained at their current levels until April 2026 and the adult ISA annual subscription limit for 2021-22 will remain unchanged at £20,000. There is no mention of changes to capital gains tax as widely rumoured and the pension Lifetime Allowance will be maintained at its current level of £1,073,100 until April 2026 when it really should be increased to match inflation (high earners already have problems with the current limit).

Corporation tax will rise to 25%, but there will be a taper for larger companies. Only 10% of companies will pay a higher rate. Comment: that will still be a competitive rate.

The Chancellor said we need an investment led recovery. Therefore for the next 2 years companies can reduce their tax bill by 130% of the cost of capital expenditure. This is the biggest business tax cut in history he claimed.

There will be a new UK infrastructure bank and a new handout for small businesses to fund IT investment and obtain management support (see for details). He also mentioned a review of R&D tax reliefs which are quite generous at present. It is planned to cap the amount of SME payable R&D tax credit that a business can receive in any one year at £20,000 (plus three times the company’s total PAYE and NICs liability), but a review is also mentioned.

There are a number of hand-outs for greening of the economy, as one might expect, but there are also more hand-outs to protect jobs and to support Covid-19 vaccination roll-out and research projects.

The FCA will be consulting on Lord Hill’s review to encourage companies to list in UK markets.

There will be more Freeports with 8 locations already identified.

In summary, this budget should be good for business but small software companies may be concerned about the changes to R&D tax credits.

More details of the Chancellors speech here:

Postscript: Reaction to yesterday’s budget was generally negative, but nobody likes higher taxes. The general view is that the Chancellor has just kicked the bucket down the road. More borrowing in the short term to finance the recovery and keep people in employment, but much higher taxes later. I think the budget is a reasonable attempt to keep the economy afloat and could have been a lot more damaging for business if he had taken a tougher line.

Roger Lawson (Twitter:  )

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More on the Capital Gains Tax Review

I commented briefly yesterday on the Review of Capital Gains Tax by the Office of Tax Simplification (OTS)  – see where I called it a “missed opportunity” to substantially reform the tax.

The more one looks at their proposals the more some of them appear to become absolutely bizarre. For example I mentioned the proposal that the rebasing of an asset to the current value when it is inherited should be removed – in effect the new owner would have the original cost retained.

This has two implications. Firstly it means that the full value of the same asset is taxed twice – once in IHT when it is inherited, and again when the inheritor subsequently disposes of it in capital gains tax. At least at present, the inheritor only pays tax on the growth in value during their ownership. But if the latter tax is based on the original value rather than the last inheritance, it could go back very many years in time. This is what Tim Stovold of Moore Kingston Smith said in the FT on this issue: “If this change should become law, capital gains could accrue across multiple generations making assets unsaleable due to the astronomical tax liability — a liability that could come home to roost if they were ever sold”.

The second issue with this is that in practical terms it means that an inheritor would need to know not just the value of the asset as fixed by probate, but the value when originally acquired by the deceased. This could be an impossible task because past records are rarely kept with such accuracy and longevity.

The FT published a good article under the headline “What does CGT review mean for investors” where it pointed out other problems with the review’s proposals and quoted a number of people giving negative comments.

One can only conclude that if the Government pushes ahead with these proposals, that one should rearrange one’s financial affairs to hide as much as possible in ISAs and SIPPs, or buy big houses to live in (not subject to CGT) and not invest in company shares or your own businesses. Or alternatively avoid accumulating assets and spend the cash before you die. This surely makes no sense in policy terms!

Roger Lawson (Twitter:  )

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Capital Gains Tax Review – A Missed Opportunity

The Government Office of Tax Simplification (OTS) has published a first report on its review of Capital Gains Tax. I did actually submit a personal response to their consultation on this subject back in August – see This is one thing I said in that: “It is of course a horribly complex tax with several different rates and numerous exemptions”.

The OTS suggests that Capital Gains Tax rates be more closely aligned with Income Tax rates but it also suggests that if that is done a form of relief for inflationary gains be done. I tend to agree with that proposal as it is certainly an anomaly that income is taxed differently to capital gains (it’s easy to change income into capital gains or vice versa). The lack of indexation relief is also a sore point to anyone who holds shares for long time periods.

There is apparently a particular concern about the owners of small businesses retaining cash in their companies rather than paying it out in taxable dividends. They can then realise it as a capital gain later at a lower rate of tax.

They also recommend reducing the annual exempt amount (currently £12,300) to between £2,000 to £4,000. There is clearly a lot of “tax management” taking place at present where people use up the allowance by deferring or bringing forward disposals. Reducing the allowance to a level where it just reduces some administrative effort (excluding those taxpayers with minimal liabilities) makes sense.

The OTS is also suggesting that the rebasing of an asset to the current value when it is inherited should be removed – in effect the new owner would have the original cost retained.

They also propose changes to Business Asset Disposal Relief and Investors’ Relief including scrapping the latter as it seems to be little used.

All of the above changes would generate very substantial additional revenue for the Government, but only if people did not change their behaviour as they always do of course in response to any demand for more tax. Harmonisation of tax rates makes sense but only if the overall tax taken is unchanged.

It is also unfortunate that the OTS review has ignored suggestions for more substantial changes such as permitting gains to be “rolled-over” as I suggested or the proposals submitted by ShareSoc. They just seem to be tinkering with the details rather than making proposals for substantial reforms to simplify the tax.

But it’s worth pointing out that the Government might ignore their recommendations as tax rates and tax structures are political decisions in essence.

The full OTS report is present here:

Roger Lawson (Twitter:  )

Modernisation of Stamp Duty

HMRC have announced a “Call for Evidence” on the “Modernisation of Stamp Taxes on Shares Framework”. If you deal mainly in the shares of public companies you may not know much about this subject – I certainly don’t. But the consultation document is very enlightening – see link below. That’s if you can understand it because this tax seems to be like capital gains tax – horribly complicated as it has been built up over many years and with a large number of exceptions.

It is of course called “stamp duty” because back in time the transfers of title actually had to have a postage stamp affixed to the document as evidence that tax had been paid, or be otherwise “embossed”. Wikipedia has a good account of the history of stamp taxes. In the past it was even applied to patent medicines, gold and silver plate, hats, gloves, solicitors licences, pawnbrokers licences, hair powder, perfumes and cosmetics. Perhaps we should thank that it is only applied to shares and property/land at present.

Here’s what I thought I knew about it before reading (other readers can correct me if I have anything wrong):

Public company shares are almost all cleared through Crest and subject to Stamp Duty Reserve Tax (SDRT) which is collected by the transacting stockbroker from the purchaser at the current rate of 0.5%. But if you are arranging the transfer of certificated shares directly from an existing holder (for example if you are acting as executor for someone who has died holding such shares) then until recently you had to physically visit the Stamp Office or post the transfer document to them so they could physically “stamp” it. The share registrar would not accept the transfer form without it being stamped first. Needless to say, with the Covid-19 epidemic rampaging, HMRC now accept emailed documents and electronic signatures instead which just about gets them into the twenty-first century.

Transfers of private company shares (or public company shares not in Crest – I recall there are a few), have to go through the same process. In the past this meant large deals could be delayed from completion while awaiting stamping.

But some shares are exempt from stamp duty. You don’t pay stamp duty on shares where the company is registered in a foreign country (outside the UK). But Wikipedia says this: “A unique feature of SDRT, compared to other purely domestic taxes in the United Kingdom, is that more than 40% of the annual intake is collected from outside the UK, thus creating an annual inflow of approx. £1.5 billion from foreign investors to the UK government”. This appears to relate to transfers of offshore (i.e. non-UK) investors, primarily US fund managers who operate depositary receipt or clearing schemes on which a higher rate of SDRT is paid.

The UK may be the only country that penalizes its investors for buying British companies – buying in a market outside of the UK isn’t subject to a charge, and neither are investments in bonds issued by corporations or the government.

However shares in AIM listed companies are also not subject to stamp duty as it was abolished in 2014 – with one exception – those of AIM companies that are “dual listed”, i.e. also listed on another recongized public exchange.

Certificated shares are also exempt in the following circumstances:

  1. shares that you receive as a gift and that you do not pay anything for (either money or some other consideration)
  2. shares that your spouse or civil partner transfers to you when you marry or enter into a civil partnership
  3. shares held in trust that are transferred from one trustee to another
  4. transfers that a liquidator makes as settlement to shareholders when a business is wound up
  5. shares held as security for a loan that are transferred back to you when you repay the loan
  6. transfer to the beneficiaries of a trust when the trust is being wound up
  7. shares that someone leaves to you in their will
  8. shares transferred to you when you get divorced, or when your civil partnership is dissolved
  9. certain types of loan capital
  10. shares valued at less than £1,000.

Such transfers still need “stamping” but with exemption claimed.

To quote from the consultation document: “Some of the most common Stamp Duty reliefs which customers claim relate to companies: intra-group relief; acquisition relief and reconstruction relief. Because the reliefs exist only in Stamp Duty and not in SDRT, anyone subject to SDRT who wants to claim those reliefs has to convert the share certificate into paper form from electronic form and submit that instrument for stamping under Stamp Duty. This creates administrative costs for both the customer and HMRC”; or complex work-arounds.

Note that Stamp Duty and SDRT are two separate taxes with slightly different rules. This undoubtedly creates confusion. HMRC does not have powers to enforce collection of stamp duty (but it does for SDRT) and there is nothing in legislation to say who is liable to pay it. However an unstamped instrument cannot be used as legal evidence.

There is another very big exemption from stamp duty and that is for “intermediaries” such as market makers. To quote from a 2015 paper by Prof. Avinash Persaud which is definitely worth reading (see link below):

“Comparing tax revenues and turnover suggests that a little more than a third of total turnover in UK equities; 37% is subject to the tax, and 63% of turnover is between tax-exempt parties. The principal exemption or relief from stamp duties on share transactions is a share purchase by an intermediary. The intention of this relief is that entities that provide liquidity to financial markets, by standing ready to buy or sell securities from others and accepting an obligation to trade when requested during the trading day, should be tax exempt. The intention of market makers is not to hold on to the security or make money from doing so but rather to facilitate trade; hence the payment of stamp duty is deemed inappropriate. Turnover between genuine market makers is significant, but it is a far cry from 63% of turnover. Prior to the advent of High Frequency Trading (HFT), approximately 20% of turnover used to be driven by market makers.

It is clear that in the UK, the intermediary exemption from stamp duty is being abused. It has become stretched to include activity that was not strictly intended by the law. The balance of the turnover of exempt parties, which is not genuine market making, is largely made up of High Frequency Trading (HFT) and the non-market making activities of intermediaries. Most significant is the turnover generated by intermediaries hedging in the share markets their end-customers’ activity in Contracts for Differences (CfDs), Financial Spread Bets (FSBs) or other derivative instruments. This is certainly not market making”.

A way for private investors to avoid stamp duty on share transactions is to use Contracts for Difference (CFDs) or Spread Bets. These are considered to be “derivatives” but why should they be exempt?

This raises the whole question as to why some transactions are exempt while others not. Why should professional investors not incur the tax while private investors do so? And why should derivatives such as CFDs be exempt? And why should high frequency traders be exempt? What is the logic behind these rules as they tend to encourage speculation as opposed to long-term investment.

But it seems that HMRC are not of a mind to consider the principles of these taxes, just some of the administrative issues.

For more information, see ; and

Persaud Paper:

Roger Lawson (Twitter:  )

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Capital Gains Tax Reform? Surely Long Overdue

Last week the Office of Tax Simplification (OTS) announced a review of Capital Gains Tax. They have invited evidence and there is a simple on-line survey you can complete on the subject (see link below). As someone who occasionally pays capital gains tax, I give you my views on the subject below.

It is of course a horribly complex tax with several different rates and numerous exemptions. I need to employ an accountant to work out my self-assessment tax returns when I don’t consider my affairs particularly complex – I am mainly invested in listed shares, although I do have a few EIS and VCT investments. My accountants use specialist software to do the calculations, not generally available to retail investors and even that seems to be prone to complex misunderstandings.

This also puts a great burden on HMRC in terms of administration when it brings in less than 1% of tax revenues. Plus there is an enormous amount of effort put in by investors and their advisors to avoid paying the tax (there are lots of ways to do so). Indeed one could argue that the current Capital Gains tax regime was invented by accountants as a “make work” project due to the complexity of the rules.

Should the tax be scrapped altogether as some people have suggested? I don’t think so for the following reason: It is very easy to convert income into capital gains, or vice versa. I recall this was done many years ago by the Beatles when instead of receiving royalties they sold the revenue stream from music royalties as an asset. But even private investors can do this – for example by investing in investment trusts that roll up the income and don’t pay it out in dividends. Another example is that of Venture Capital Trusts which are often effectively converting capital gains into tax free dividends. Or of course investors can simply avoid trading in individual shares and invest in trusts or funds which are not taxed on their individual holdings and realisations thereof.

It is therefore irrational to have different rates for capital gains and income which is currently the arrangement.  That’s clearly one simplification that could be made, although investors will be furious if they have to pay more tax as a result.

But one big problem is the lack of indexation of capital gains which was scrapped some years ago by Gordon Brown and replaced by allowances. This means that you pay tax not on the real change in the value of a share, but on that created simply by inflation when the shares are worth no more in reality. This may not seem a major issue in a period of low inflation, but with money being printed like it is going out of fashion by Governments, high inflation might well return. Even a low rate of inflation over many years can result in a very large tax bill, and even worse, you may not have the option to retain the holding. A takeover bid for a company can effectively force a sale. Indexation should be reinstated as it was not difficult to take it into account in your tax returns.

Capital Gains Tax also distorts investment decisions. For example, you might hold on to a shareholding longer than you otherwise would because you know a large tax bill will result. So your portfolio may end up containing a lot of companies with poor prospects and their market share prices might remain higher than they otherwise would be, i.e. the market in the shares is distorted.

It also causes sales of shares to take place when they might not be best timed, simply to use up capital gains tax allowances in the current tax year. Or even to anticipate changes to tax rates and allowances by decisions from new Chancellors or new Governments.

The existing arrangements encourage the use of investment trusts and funds rather than personal investors holding individual shares. This has had a negative impact on the stock market as investment decisions are now made by fund managers rather than real owners. It has also meant that much of the profits generated by public companies end up in the hands of the fund manager rather than the end investor who rake off 1%, 2% or more per annum which can often be a very high proportion of the real return generated by companies. It also has a negative influence on corporate governance as fund managers have little interest in controlling the pay of directors for example. In effect we have a lot of absentee owners.

These defects might be considered an argument for scrapping CGT altogether but that is unlikely. However, an alternative proposal would be to reform it so that a rollover of investments did not incur tax. In other words, if you reinvested the proceeds from a sale of shares or other assets into new assets within a period of time then no tax would be payable. If no net profit is actually realised, why should investors pay tax?

Do people even care about paying tax on their profits when they die? Capital gains tax liability currently disappears on death and that might need to be changed if rollover was permitted but there is also interaction with Inheritance Tax here which would also need to be reconsidered.

Property is taxed at different rates, although the property you live in is exempt. This has of course encouraged people to invest in a home as an asset for their retirement. This has powered the house price bonanza in recent years and encouraged people to occupy bigger houses than they need. Although encouraging home ownership is meritorious, it is not clear why gains from owning a home should be tax free. Reforming this could be a political hot potato although a “roll-over” provision and other exemptions could mitigate the adverse consequences.

Capital Gains Tax has always had a negative impact on business creators although there are allowances that reduce their liability when a business is sold. Much tax planning activity is prompted by such outcomes which typically undermines the tax take. Another related issue is that high capital gains tax rates encourage wealthy entrepreneurs to move to countries where capital gains taxes are lower or even zero. We lose their expertise and also they spend their money in other countries as a result.

In summary Capital Gains Tax is ineffective, generates relatively little in tax from very few individuals and is a disincentive to entrepreneurial activity. It can result in tax being paid on purely inflated share prices and when no actual cash is realised as the profits are soon reinvested. It does of course discourage therefore new investment and distorts the stock market.

In my opinion, capital gains tax needs a complete overhaul. If you agree, or disagree, please add some comments to this article. I’ll ponder those before making a full submission to the OTS review.

OTS Capital Gains Tax Review:

Roger Lawson (Twitter:  )

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