EMIS Bid and Comments on Capital Gains Tax

Last week was certainly a depressing one for stock market investors. My portfolio was down substantially even taking into account the last-minute announcement on Friday of an agreed takeover bid for EMIS Group (EMIS).

This is a cash offer of 1,925p which is a premium of almost 50% to the recent trading price so is surely likely to be accepted. EMIS is one of my longer-term holdings – first purchased at 485p in 2011, but it has been somewhat disappointing. Overall total return has been 12.7% per annum including the latest bid premium but with a strong position in the supply of medical solutions they should surely have been making big profits in the recent pandemic and in the support of the NHS where large amounts of money are being spent. I think the big problem has been having the Government as a major customer who tend to dictate the pricing.

I did buy a few more shares recently at 1,272p but failed to have the courage of my convictions and should have bought more. Like many investors no doubt, I have gone on a buying strike and am selling as the market trends down rather than buying.

My capital gains tax charge for last year is only moderate but with holdings in Ideagen and EMIS soon to be realised I will be paying a big bill this year. Capital gains tax should be indexed now that inflation is reaching 10%. I will be paying tax on fictitious, not real, gains.

Perhaps ShareSoc should be taking up that issue.

Will the market improve over the summer? I doubt it until there is better news on the economic front. We appear to be heading into a worldwide recession prompted by higher commodity prices. There may be some share bargains appear in the next few weeks but I personally won’t be rushing back into the market.

Meanwhile I am at least out of hospital but have written to the Chairman of the local NHS Trust to complain about the dysfunctional management and waste of resources. There is lots of money being spent on the NHS but the patient experience is still crap.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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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: https://twitter.com/RogerWLawson  )

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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: https://www.gov.uk/government/publications/ots-capital-gains-tax-review-simplifying-practical-technical-and-administrative-issues . If you think you might be affected by these proposals it’s best to read the whole report.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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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 https://www.roliscon.com/Capital-Gains-Tax-Review.pdf. 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: https://www.gov.uk/government/publications/ots-capital-gains-tax-review-simplifying-by-design

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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: https://www.gov.uk/government/consultations/ots-capital-gains-tax-review-call-for-evidence-and-survey

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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