Lib Dems plan overhaul of capital gains tax

Lib Dems plan overhaul of capital gains tax

Jun 12, 2024

The Liberal Democrats are planning to double the rate of capital gains tax for high earners, a funding boost for HMRC, hikes in council tax rates for second home owners and abolition of loan charge

The manifesto sets out a package of £27bn in tax rises by 2028-29, prioritising ‘tax cuts, when the public finances allow’ and cutting income tax ‘by raising the tax-free personal allowance, benefitting the vast majority of families and taking more low-paid workers out of paying income tax altogether’.

HMRC would see an extra £1bn investment a year to improve customer support and boost compliance and anti-avoidance activities, earmarked to raise £7.23bn by the end of a four-year parliament.

There are also plans to reform capital gains tax (CGT) to target the ‘super wealthy’ to close loopholes exploited by the wealthy to raise £5.21bn by adjusting the rates and basing them solely on capital gains.

The manifesto itself does not set out specific detail about how rates of CGT will be increased – the current basic rate CGT is 18%.

However, in a separate blog on the Lib Dem website, published 10 June, it states: ‘Under our plan, there would be three rates of capital gains tax, like there are for income tax: 20% (for gains up to £50,000), 40% (between £50,000 and £100,000) and 45% (over £100,000).’

For the 2024/25 tax year, CGT is charged at the rate of either 10% or 18% for basic rate taxpayers. For higher or additional rate taxpayers, the rate is either 20% or 24%.

But there will be protections for small business with a new CGT relief and an increase in the tax-free allowance from £3,000 to £5,000, on top of a new tax-free allowance for inflation.

They will also end retrospective tax changes such as the loan charge brought in by the Conservatives, and review the government’s off-payroll working IR35 reforms to ensure self-employed people are treated fairly.

In a blow for second home owners and short letters, the Lib Dems plan to give local authorities new powers to control second homes and short-term lets in their areas by allowing them to increase council tax by up to 500% where homes are being bought as second homes, with a stamp duty surcharge on overseas residents purchasing such properties. There will also be a new planning class for these properties.

The Lib Dems said they wanted to ‘implement a tax policy that recognises how high the Conservatives have raised personal taxes, making the cost-of-living crisis worse, by instead focusing tax changes on reversing the Conservatives’ tax cuts for big banks and imposing a proper, one-off windfall tax on the super-profits of oil and gas producers and traders’.

High consultancy bills will also be halves with government and Whitehall departments facing a slashing of expenditure from the current £1.26bn to £630m.

They would also introduce a 4% tax on the share buyback schemes of FTSE 100 listed companies, to incentivise productive investment, job creation and economic growth. This is set to raise £1.42bn. This is already a policy used in other countries.

With many more people working in the gig economy there are plans to modernise employment rights to make them fit for purpose, including:

• establishing a new ‘dependent contractor’ employment status in between employment and self-employment, with entitlements to basic rights such as minimum earnings levels, sick pay and holiday entitlement.

• reviewing the tax and National Insurance status of employees, dependent contractors and freelancers to ensure fair and comparable treatment.

• setting a 20% higher minimum wage for people on zero-hour contracts at times of normal demand to compensate them for the uncertainty of fluctuating hours of work.

Another issue affecting workers and employers will be reform of the statutory sick pay system by making it available to the more than one million workers earning less than £123 a week, most of whom are women and aligning the rate with the national minimum wage. In addition, payments would be made available from the first day of missing work rather than the fourth. Support for small business employers will also be introduced to help with SSP costs.

A new subsidised energy-saving homes scheme will be launched with pilots to find the most effective combination of tax incentives, loans and grants, together with advice and support.

There would also be a new sewage tax on water company profits and changes to create a ‘proper’, one-off windfall tax on the super-profits of oil and gas producers and traders, pulling in £2.12bn.

Banks would also be in the Lib Dems’ sights with the restoration of the bank surcharge and bank levy revenues to 2016 levels in real terms, raising £4.25bn.

Another tax hike for certain primarily multinationals will be an increase in the rate of the digital services tax on social media firms and other tech giants from 2% to 6% will raise an additional £2.09bn by 2028-29 to fund dedicated, qualified mental health professionals in every primary and secondary school.

Frequent flyers and holiday makers would also see changes, with plans to reduce the climate impact of flying by reforming the taxation of international flights to focus on those who fly the most, while reducing costs for ordinary households who take one or two international return flights per year.

There will be a new super tax on private jet flights to raise £380m, and a removal of the VAT exemptions for private, first-class and business-class flights.

They would also ban short domestic flights where a direct rail option taking less than 2.5 hours is available for the same journey, unless planes are alternative-fuelled.

Other transport measures would reintroduce the plug-in car grant and cut VAT on public charging.

In a positive move for carers, the Lib Dems would increase carer’s allowance by £20 per week and expand eligibility for it by raising the amount carers can earn and introducing an earnings taper to end the unfair cliff-edge, reducing the number of hours’ care per week required and extending it to carers in full-time education.

It will also work with partners in international forums, including the OECD and the UN, to tackle international corporate tax avoidance for the benefit of all countries and make the case for increasing the global minimum rate of corporation tax to 21%. The current global base tax rate for multinationals is 15%.

Criticising the Conservatives, the Liberal Democrats leader Ed Davey said: ‘They have taken people for granted, failing to deliver the investment needed to bring prosperity to all nations and regions of the UK.

‘They left families and businesses to suffer the effects of their cost-of-living crisis without enough support, hit people with years of unfair tax rises, such as the freeze on income tax thresholds, and their promises to ‘level up’ have proved hollow.’

Reacting to the manifesto, Paul Johnson, director of the Institute for Fiscal Studies, said: ‘By focusing on taxing banks, energy companies and tech giants, many of these tax rises are intended to look ‘victimless’ – but of course they are not.

‘We are already raising more from taxing companies than at any time in decades.

‘There are clear risks that their package of tax measures would not raise the £27 billion a year that they claim. And some of the tax raising measures are an economically bad idea. We should not, for example, be taxing share buybacks.