Today, CGT is fiendishly complicated.
It starts at 10pc on profits above £3,000, or 18pc on residential property. People who pay any rate of income tax above the basic rate are charged 20pc on capital gains, so long as it’s not property or private equity gains. Those private equity profits – so-called carried interest – are taxed at a rate of 28pc.
Advani says the current set-up is “bad for growth” because it incentivises people to “repackage their income in a form that gets the benefit of capital gains tax”. Employees can set up companies to earn through just to take advantage of the favourable tax system.
He believes Reeves should take inspiration from Lawson. Removing distortions and introducing incentives could actually boost growth, Advani argues.
“The way to encourage investment isn’t by giving people a pat on the back on the way out, but a break on the way in,” says Advani.
Stuart Adam at the Institute for Fiscal Studies (IFS) also believes CGT rates should be simplified and brought back in line with income tax. Some form of inflation or interest rate allowance should also be included and there should be a proper mechanism to help people “cushion” losses when they do take risks, he adds.
“In the context of entrepreneurship, one thing that’s often argued is that people are putting their capital at risk, and you need some recognition of that. Having a high rate of CGT doesn’t necessarily disincentivise taking risks, as long as you cushion the downside risk symmetrically.
“That means if you make a big gain, we will tax you, but if you make a big loss, you’ll be able to get some sort of offset for that. Okay, if you only tax the upside and you don’t cushion the downside, that’s where there is a real effect of discouraging risk-taking.”
Not everyone agrees. Sir John Redwood, the former head of the Number 10 Policy Unit under Margaret Thatcher, believes raising the rate would dampen investment.
“A lot of people see it as double taxation, because they paid income tax when they earned the money. They then save the money, and get clobbered again if they invest it intelligently.”
Sir John, who worked in Downing Street in the years before the 1988 Budget, says he always opposed the move.
“I don’t remember it being a major row, but my advice was always not to put capital gains tax up, but to cut income tax as much as possible.”
Even experts agree the tax base is fragile.
The now disbanded Office for Tax Simplification (OTS) warned in an influential 2020 report that “most gains are concentrated among relatively few taxpayers, who also tend to have more flexibility about when they dispose of their assets”.
It estimated that, while aligning CGT with income tax could “theoretically” raise an additional £14bn a year, much less was likely to be raised in practice because of behavioural change, such as hanging on to investments or selling in advance of tax changes.