Organising a coalition agreement is never easy. There has to be give and take on both sides.
However, the Conservatives have made a big mistake in accepting some aspects of Lib Dem tax policy – especially in the area of capital gains tax (CGT). The tax is seriously misconceived and raises little revenue. It can, however, do much economic harm.
It is likely that there will be exemptions for various so-called business assets and for business activities that the Government regards as entrepreneurial. But these distinctions are arbitrary. If I had invested in Microsoft shares when it was a small fledgling company, why should that investment be treated differently from the investments of an owner-entrepreneur?
Like inheritance tax, CGT will create an industry of techniques and structures that are simply designed to avoid the tax. Nice work for tax lawyers.
But the really pernicious aspect of CGT is that it is generally a double tax. We think of capital gains enriching somebody as if they arise like manna from heaven – and therefore are worthy of being taxed. But investments are valued for the income they produce.
The values of investments fluctuate up and down, but investments only go up in value in a sustained way when investors expect them to be more profitable in the long term. Those profits, of course, will be taxed when they are earned.
Two groups of people will be particularly affected by this change. The first are those investing in the buy-to-let market (people who own second holiday homes are pretty good at avoiding the tax altogether). If a landlord owns half a dozen homes and rents them out to students, he already pays tax on the rent he receives.
If the values of the properties go up he may, in the future, have to pay 50 per cent capital gains tax on the increase in value. Taxing the landlord on the rise in the value of the houses is double taxation and bordering on confiscation.
Recent governments have tried hard to liberalise the rented housing market – though the last government threw some sand in the wheels. This proposed move on CGT threatens to send us back to the dismal days of the 1980s.
A similar situation arises for the owners of shares. George Osborne thinks that returns to debt finance for companies are under-taxed and has spo