What caught my eye this week.
This week we’ve been served notice that serious hikes to capital gains tax [1] could be coming.
The Guardian reports [2]:
A tax raid on buy-to-let properties and other forms of wealth could raise up to £14bn to help repair the government’s battered finances, after a report commissioned by the chancellor recommended a major overhaul of capital gains tax.
Flagging a tax squeeze on the well-off to help pay for coronavirus, the maximum capital gains tax (CGT) rate of 28% could be raised by Rishi Sunak closer to income tax rates, where the top rates are 40% and 45% in England and Wales.
Under the proposals, there could also be deep cuts in the profits that share investors can make without paying tax, and other technical adjustments that could, in effect, push up inheritance tax bills.
For more on the specifics of the report by the Office for Tax Simplification – which cynics might argue is starting to sound like Orwell’s Ministry of Peace – check out the deep article over at ThisIsMoney [3]. It goes into many of the potential impacts to capital gains tax rates, inheritance taxes, and more.
Gain stage
It’s the nature of tax hikes that people tend to think they’re fine if they believe they’ll never be hit by them.
Whereas of course those tax changes that paint a target on their backs are seen as grossly unfair…
And I am only human.
A little over a decade ago now, I exited a startup company that I’d co-founded. We had some disagreements about its future direction, and I left with roughly the money I’d put in – a few tens of thousands of pounds.
Sounds like a nice lump sum but keep in mind I was mostly just getting the big proportion of my savings that I’d invested (and risked) back, with any additional money hardly covering the income I’d forgone for two years.
I couldn’t put all this into ISAs at once due to the annual allowance. Pensions were different in those days, and looked unattractive to me.
Perhaps I should have spent it all on wine, women, and song? Or put it all into buying a home to live in where it would grow untroubled by the taxman for life.
That’s something nearly everyone with any money thinks is fair, incidentally, but which makes it even harder to keep up if you’re not a homeowner…
In the end I decided to risk investing it in a bunch of share picks outside of tax shelters. This compounded a paperwork issue [4] I already had from previous investments outside of ISAs, but I thought it was worth the hassle and risk if I could hold for the long-term.
This tranche of investments did very well. We’re talking multi-bagging gains in just a few years. Outside of tax shelters.
I’ve managed to carefully defuse [5] some of the gains over the years, but other holdings have continued to grow.
The result is I still have six-figures in capital gains, should I have to sell.
My plan had been to use my annual CGT allowance every year. The money raised would go towards my ISA allowance [6]. I am not and mostly never have been a super high earner. And since I bought my flat I’ve never been over-blessed with free cash to top my ISA up with.
Obviously my plan may have to change if the CGT allowance is reduced or scrapped altogether, or if the rate is hiked.
Zero logic
Now many of you will say “so what?” This wasn’t money I earned by the sweat of my brow.
That’s a coherent argument.
However it’s not an argument that many people seem to apply to the giant windfalls people get when they inherit.
I do and would hike inheritance tax to the max, because the recipient literally did nothing to earn it. They didn’t even forego consumption or take a risk.
But no need to reply in anger. I know most of you disagree!
Proponents of CGT hikes also tend to muddle different things together. So they will talk about a high-earner with cunningly structured finances paying a far lower tax rate then their cleaner, 10% say, and then argue in the same breath that CGT rates should be hiked and the ‘distorting’ annual allowance should be scrapped.
But that 10% tax rate is due to entrepreneur’s relief, not standard CGT. And enabling somebody to realize a little over £12,000 in capital gains from their investments (which may have taken many years to build up) is hardly what enables the big swinging dicks of Canary Wharf to bring home their millions at a lower tax rate, if that’s the complaint.
As for distorting behaviour – the mooted changes will only make this worse. People will hang on to assets that they might otherwise have disposed of, simply to avoid the tax charge.
Perhaps you believe this is all good if you see longer-term ownership as a virtue in itself (I’m unconvinced) but it’s undeniable that it stops people freely juggling their assets to suit their circumstances, or their views about valuation.
Scrapping CGT altogether – for a 0% capital gains tax rate, as enjoyed by radical countries such as New Zealand and Switzerland1 [7] – would surely make more sense from a simplification perspective.
Finally, you might say I don’t deserve my six-figure capital gain because it doesn’t amount to any social good.
But if that’s true (I’d debate it) then that’s true of all our investments.
What’s more, is a CEO on several million pounds a year contributing to the social good?
Heck, is a software engineer perfecting ever more pernicious Internet advertising doing so?
Why not increase tax rates on all incomes we consider socially useless?
Why not indeed.2 [8]
You can pay your own way
There’s no doubt that the Covid-19 pandemic and to some extent our chosen response to it has left the State’s finances in a hole.
(I believe it also means we can expect the low interest rates that make that debt manageable to last for years. Probably decades.)
I’ve been warning about this growing bill from day one, even as some others have retorted that we should lockdown and lockdown again, with apparently scant concern for the consequences, financial or otherwise. (Any debate on Covid over on this thread only [9] please.)
But regardless, the mooted £14bn is neither here nor there in the grand scheme of things – assuming it is even recoverable without people changing their behaviour.
If we are going to reform taxes, let’s do it properly.
It’s high time we created a tax system that makes logical sense across the board. We should scrap fiddly income tax bands and cliffs, get rid of tons of exemptions, simplify and massively expand inheritance taxes (I’d do this by taxing recipients rather than the estate) and much more.
In practice though I’m sure we’ll do what we’ve mostly always done – which is whatever politicians can get through the Overton Window [10].
Okay, the cat has seen the pigeons. Let’s hear what you think, enjoy the links, and have a great weekend!
From Monevator
Stress management – Monevator [11]
Are retail share dealing platforms fit for purpose? – Monevator [12]
From the archive-ator: Not your father’s retirement – Monevator [13]
News
Note: Some links are Google search results – in PC/desktop view you can click to read the piece without being a paid subscriber. Try privacy/incognito mode to avoid cookies. Consider subscribing if you read them a lot!3 [14]
London rents fall 5% amid exodus of workers – ThisIsMoney [15]
New government unit to pay back over £100m in underpaid state pensions to short-changed women – Which [16]
The Law Commission has published a paper on the legal uncertainties of owning shares, bonds, and funds via intermediaries – Law Commission [17]
Investment sites hit by trading outages after positive vaccine news – ThisIsMoney [18]
Are big retailers exploiting lockdown loopholes? [Maybe, but it’s helpful] – BBC [19]
The global rich are rushing to buy UK country estates – Bloomberg via MSN [20]
The FT is hosting a digital discussion on retirement on 30 November with Sir Steven Webb – Sign up at the FT [21]
Vaccine Monday’s FANG rout doesn’t make a market revolution – Bloomberg [22]
Products and services
Coventry’s new three-year Poppy Bond to pay savers 0.85%, the lowest yet – ThisIsMoney [23]
We both get £50 to invest at Seedrs if you sign-up via my link [24] and invest £500 in 30 days – Seedrs [24]
Tesco says sorry for online Christmas delivery queues – Guardian [25]
Zopa has launched an app-based travel credit card – Which [26]
When you switch your ISA to Interactive Investor [27] you can get £100 cashback – Interactive Investor [27] [Affiliate link]
Investment trusts stay on-course through the pandemic [Search result] – FT [28]
From dry pasta to cardboard coffins: when to buy basic – Guardian [29]
Homes for sale featured in TV and films, with pictures – Guardian [30]
Comment and opinion
Dear valued client – The Evidence-based Investor [31]
Active managers struggle to prove their worth in a turbulent year [Search result] – FT [32]
The post-pandemic trade – A Wealth of Common Sense [33]
That sinking feeling – Humble Dollar [34]
Lars Kroijer’s Investing Demystified [35] in video format [Video] – YouTube [36]
Shadow trade – Indeedably [37]
My first word: more – Living with Money [38]
London ranks sixth among cities globally for ultra-high net worth individuals – Visual Capitalist [39]
On paying for an arts education – Simple Living in Somerset [40]
Solving the retirement equation [Podcast/transcript, two weeks old] – Rational Reminder [41] (via Abnormal Returns [42])
Naughty corner: Active antics
Which US stocks are most sensitive to Covid? [Heatmap] – Reasonable Deviations [43]
Horses for course: Large cap growth won’t keep winning in all markets – Verdad [44]
International Biotechnology Trust: bypassing binary bets – IT Investor [45]
Has the coronavirus affected correlation? – Morningstar [46]
Covid and politics
(Any debate on Covid on this thread only [9] please. Replies on today’s post will be deleted, for the good of financial discussion.)
Covid-19 statistics for the UK and beyond – BBC [47]
The R number for the UK is down to 1.0 to 1.2 – UK Gov [48]
Speculation about a second England-wide lockdown may have caused infection spike, say scientists – Sky [49]
Covid-19 vaccine will not mean end of the pandemic, expert warns – AP via Belfast Telegraph [50]
US hospitalizations for Covid are at an all-time high – The Atlantic [51]
Inside the hunt for a vaccine: how BioNTech made the breakthrough [Search result] – FT [52]
Global perspective of COVID‐19 epidemiology for a full‐cycle pandemic [Research] – John Ioannidis [53]
Elon Musk was tested four times for Covid in a day, with contradictory results – via Twitter [54]
Canada woos Hong Kong students as China imposes new security law – Reuters [55]
Marina Hyde: Now what does Giuliani’s Four Seasons Total Landscaping farce remind me of? – Guardian [56]
Why Trump’s lawsuits are unlikely to change the outcome of the election – Reuters [57]
Boris Johnson expels top advisor Dominic Cummings – BBC [58] (and Twitter [59]!)
Kindle book bargains
You don’t have a Kindle? Get one [60] – they’re great and save a ton of space.
The Everything Store: Jeff Bezos and the Age of Amazon by Brad Stone – £0.99 on Kindle [61]
Happy Money: The Japanese Art of Making Peace with Your Money by Ken Honda – £0.99 on Kindle [62]
Secrets of the Millionaire Mind by T. Harv Eker – £1.99 on Kindle [63]
The Finance Book: Understand the numbers by Stuart Warner – £4.19 on Kindle [64]
Next-gen console war mini-special
Xbox Series X & S [65] review: no-nonsense, next-generation gaming – Guardian [66]
Playstation 5 [67] review: fantastic new features and a revolutionary controller – Tech Radar [68]
Off our beat
Elon Musk’s totally awful, batshit crazy, bonkers, exciting year – Vanity Fair [69]
Please get your noise out of my ears [Podcast] – Freakonomics [70]
The English word that hasn’t changed meaning in 8,000 years – Nautilus [71]
I’ve played Rimworld for 700 hours. I may never escape – Wired [72]
Ghost kitchens are the future. But is that a good thing? – Eater [73]
Nicest man in rock Dave Grohl meets young fan and drumming master – YouTube [74]
And finally…
“The main problem in any democracy is that crowd-pleasers are generally brainless swine who can go out on a stage & whup their supporters into an orgiastic frenzy – then go back to the office & sell every one of the poor bastards down the tube for a nickel apiece.”
– Hunter S. Thompson, Fear and Loathing on the Campaign Trail [75]
Like these links? Subscribe [76] to get them every Friday!
- Essentially. Obviously there’s realms of tax minutia here as everywhere with tax. [↩ [81]]
- Plenty of reasons! I am just extending the logic here. [↩ [82]]
- Note some articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”. [↩ [83]]