Lib Dems split on CGT

Tom Griffin

I wonder whether this was the same interview as the one on Thursday in which Laws told The Times he wasn't gay?

And if so did the pressure over his sexuality contribute to his rethink on CGT?

Tom Pride

From Campbell’s book – ‘Mr Campbell recalls an incident on 14 March, 1995, when John Prescott, then Mr Blair's Labour deputy, "really laid into GB - indecisive, not as clever as he thinks he is, not a team player, looking after himself"’

Could say the same about Cable. Someone should stick a pin in him and let some of the inflated arrogance out.

Best solution to the CGT abuse I’ve seen so far:

http://blogs.telegraph.co.uk/finance/jeremywarner/100005951/taxman-to-target-private-equity/

‘If it is the private equiteers the Government is trying to get at, there is actually a perfectly simple solution; a retired banker chum of mine, Bruce Fireman, has written to the Chancellor pointing it out. Here’s what he suggests in his letter:

One of the mischiefs identified during the last Parliament was that employees, directors and partners of private equity firms and hedge funds were able to turn the fruits of their employment into capital gains, and it was claimed that they therefore paid tax at a lower rate than the cleaners of their offices did.

The usual way of doing this was for the people concerned to buy what is popularly called “sweet equity”. It’s sweet because it costs a fraction of what the equity subscribed by the funds and investors costs, yet gives the same returns.

Let’s suppose an employee buys an “A” Ordinary share for 1p. The investors buy “B” Ordinary shares for £1. Yet the returns on the two classes of shares are identical. In the UK, all the gains made by the employee are taxed as capital gains. Not in the United States of America, however.

The Internal Revenue Service has an “at-risk rule”. This holds that if you are in the position of an employee and paid a penny for a share which gives the same returns as a share someone else paid a dollar for, only one one-hundredth of the gain is treated as a capital gain. The other ninety-nine one- hundredths is income.

The logic of the American rule is simple: if a taxpayer really has money at risk, then the profit made is treated as a capital gain and taxed at a lower rate, in recognition of the need to encourage business investment. But if the money is put at risk by an employee, director or partner in an investment firm and produces a disproportionate return compared to the money put at risk by financial investors in the same business, the profit on the disproportionate gain is a fruit of employment and taxable as income.

Thus in the example given, 1% of the gain is taxed as capital and 99% as income.

There’s no fancy drafting involved here, and the principle is easily grasped. The IRS has done this for ages. I’m sure HMRC is well aware of how the US at-risk rule works and knows how to apply the same idea to our tax laws. So please can we do the same as the USA?’

Tack this on to John Redwood’s idea and there’s the solution. A general hike in the rate to 40 / 50% would be retrospective confiscatory taxation worthy of an obnoxious socialist like Cable but unworthy of a Conservative.

Rhoda Klapp

The real issue on CGT is goalpost-shifting. The rate change is designed to get at a pile of cash the treasury has spotted. Whatver savers do, the treasury is after them. What we need is a stable regime, to be left alone. I am not entirely keen having my (hypothetical) nest egg stolen to funded the unfunded part of public service pensions. (Except the one I get, of course)

jon dee

Like many, my hopes and best wishes lie with the coalition, to bring the return of economic and social sanity to our browbeaten and confused country.

After being lied-to by Labour for so long, we need every ounce of honesty and fairness from our new rulers, in their quest to correct the economy.

David Laws, and lets hope he remains in situe, has obviously realised the rank unfairness and voter peril inherent in punitive CGT proposals.

Redwood's letter is common sense to long term investors like myself and current CGT considerations would represent the ultimate betrayal by a government I support. To attack small savers would be a sure-fire way of opening the doors to the incompetents that got us into this mess.

We don't need more dogma dominated policies, however saintly the proposer, but surely Cameron and Clegg must realise this.

Snowman

Rhoda Klapp @ 1.36:

‘whatever savers do, the Treasury is after them’.

Exactly, they have the money. And contrary to popular belief, evidence shows irrefutably that savers keep on saving, even more so when they get clobbered, however much they shout to the contrary. It’s in their genes, I guess.

For many if not the most of the ones owning shares or other near cash paper who may get hit, there’s an easy way out. Sell now because when an announcement’s made it will most likely have an immediate effect. Sell and buy either immediately, or after the new rate’s known. The cost of the sell/buy operation must be dwarfed by the saving even if the rate increase is only small, or the impact lessened by some technical trickery provided the asset shows a sizeable gain.

oldtimer

My earlier post on this seems to have got lost in the wash.

The choices for Cameron are clear:
1 re-introduce indexation;
2 adopt Redwood`s taper relief system;
3 swallow the Cable expropriation of savings hook, line and sinker.

If he has any sense he will go for taper relief. It deals with the conversion from current income to capital gain issue, yet protects longer term savers.

If he goes for Cable`s latest version of socialist expropriation he should be sacked by his party because:
1 it was not in his manifesto and he has not promoted it with either his party or the electorate at large;
2 his negotiators have neglected the law of unintended consequences.

We have been here before with Brown`s pensions tax which destroyed company pension schemes and has screwed millions of people in such schemes. Many of them will have, instead, taken the precaution - or so they thought - of investing on their own account to provide for their retirement. If Cable gets his way, they will now be screwed by the Cable tax.

Cable himself is, of course, sitting pretty in his "I`m alright Jack!" chair with a hefty, ministerially enhanced, index linked, MP`s pension paid for by you and me with what is left out of our taxed savings. Furthermore he is also, I imagine, ready to collect - if not already collecting - a generous index linked pension provided by Shell (no doubt what used to be called a Top Hat pension) for someone in the very senior position we are told he held. So he has not a worry in the world and he airily dismisses the concerns of others.

His tax would finally destroy any chance of a savings culture - completing the demolition started by Brown. Quite how it would be expected to promote any recovery is beyond comprehension. Why should anyone invest in business in the future when governments make such arbitrary changes to the tax system, at short notice, without prior consultation, and with total disregard for the consequences? Answer: there is no reason at all.

Simon Stephenson

"Surely few measures endanger recovery more than a tax on long-term saving and investment?"

Well ....... in the immediate short-term, it could be argued that the biggest threat to recovery is stagnant or falling demand for UK-produced goods and services, and that a policy that encourages public saving is, as far as the recovery goes, just about the last thing that we need.

I appreciate that if we were to look at overall economic re-balancing, we do need to re-establish a level of national saving that is greater than in the recent past, and that this can only be done by reducing the equivalent level of national consumption.

This is the nature of the beast the authorities are attempting to tackle - that measures to address one section of our problems can often operate in totally the opposite direction to those which are needed to address our other problems.

My own feeling, and this runs contrary to every development of the last 20+ years, is that we need to go in for a bit of import substitution, whereby we seek to redirect some of our labour force from producing non-essential home consumables into producing more-essential goods and services we currently import. So, fewer beauticians, personal trainers, diversity executives, public relations consultants and car valeters and more food producers, shirt makers and vehicle manufacturers. Developing our economy in the opposite direction seems to have brought about the crisis in which we now find ourselves.

Cat Fancier

If Laws does have to go can Redwood replace him or does it have to be another Lib Dem? The former would be a top draw solution in my view. Redwood just seems so sensible. I had always thought of the word sensible as not lending itself to positive endorsement of someone - it was just a level that someone attained, and there things stopped. People could either be not sensible at all, quite sensible, or sensible which I had thought the highest level acheivable. Yet Redwood actually seems to have exceeded this level by being more than 100% sensible, uber sensible if you will. That's why he should be brought back. The only issue would be finding someone to run his blog while he was away, finding someone as sensible would be a tough task indeed, I expect even adding together 10 school prefects wouldn't acheive the required level of sensibleness.

Rhoda Klapp

Simon, a trenchant contrarian look at savings, but I save, if I can, for my own reason, not to help the nation. It would be nice if the nation did not encourage others to spend every penny they can get their hands on then borrow more and spend that too, even if they are supporting our strange economy while doing so.

I don't think there's hope in hell of bringing back industry to this country. There is almost nothing which can't be done cheaper elsewhere, and only a major regreesion to protectionism would work. I don't want that world, free trade suits me better. A yes that leaves the nation in an unenviable position, but in my view only free enterprise without state direction can get us out. A healthy dose of de-regulation wouldn't hurt, but I fear only lip service is being paid to that desire, our politicians do not have the imagination to do what must be done, to rip up the rule book and accept that some may lose thereby.

Simon Stephenson

Rhoda

I don't say that what you would like to happen can't happen, but I think you need to have an answer to the problem of the capability level of our working population. We seem to be working on the assumption that the release of workers from old-style industry and manufacuring will lead, automatically, into them moving into the higher-skilled occupations more in keeping with the pay levels they expect. But this doesn't seem to be what's happened. Many of these people have instead moved into the manual and modestly-skilled provision of peripherally relevant goods/services, difficult to import, and exclusively for the domestic population. So the expansion of free trade has, for us, resulted so far in a concentration of our workforce into occupations where the overriding feature is that it's difficult for their outputs to be brought in from abroad.

I wonder whether this is just a cultural thing that will fade over time, or whether, more worryingly, it's that our formal and informal education system is just not good enough to raise enough average-ability people to the competence levels where we can establish a comparative advantage over the rest of the world.

David Bouvier

Tom - what you are describing has always in my time in the industry been called sweat equity - e.g. a risky reward depending on the performance of the company which involves the investment of sweat not cash - the risk profile is the same as equity investment because it could well be worthless. Odd that you want to tax hard working risk taking entrepreneurs instead of arms-length investors.

I don't generally hold with quoting long tranches of 2nd or 3rd hand posts, but I don't know my IRS tax codes so am inclined to post this:

http://sweatequity-img.blogspot.com/2008/12/sweat-equity-tax-issue-brief.html

"Issue:
When an employee or contractor accepts an ownership stake in a small private business in return for investment of their time in building the business the equity they receive is illiquid as there is no public market for it and very often transfer of the equity is restricted by the company itself. Yet, the IRS sees this equity compensation as taxable income and requires persons receiving equity compensation in a small private company to pay tax on it (IRC §83(a)) even though it is typically impossible for them to liquidate any portion of that equity to pay the tax. In addition, at the end of 2004 the ironically named “American Jobs Creation Act” was passed into law. One provision of this law has caused the IRS to promulgate new requirements regarding the taxation of deferred compensation (IRS notice 2005-1). Not only does the American Jobs Creation Act effect the tax treatment of stock options in small private companies but, of greater importance, it virtually eliminates the ability for employees and contractors serving small private companies to agree to accept creative deferred compensation (that might later convert to equity) in lieu of current payments because the types of creative agreements that are often used would be subject to a phantom income tax on the deferred portion of the compensation."

"Small businesses which desire to grow beyond a few people nearly always need ways in which they can bootstrap and compensate early employees and contractors when they are still growing and cash is tight without the IRS wanting to be paid tax on income which the individual either did not receive or has no way to liquidate. Even worse, if the company is unsuccessful and never has a “liquidity event” (e.g., sale of the company or an initial public offering) then the tax paid was on something that never had any cash value! This “phantom” income tax is especially onerous. This tax situation dramatically reduces the value and incentive for a person to put “Sweat Equity” into growing a small business and therefore impedes the growth of new small businesses. People who otherwise might be willing to invest sweat to earn equity turn away from the opportunity because the tax makes the return not worth the risk."

Actually, you seem to be unaware (as I was until it nearly messed up a financing) of HMRC rules that create the same problem - an award of illiquid potentially worthless equity to the CEO of a startup firm will attract cash tax payment at time of award based on the price at investment, not the final value of the shares. Not much of an incentive to be presented with some start-up shares and a £500k tax bill due now.

And the rules apply to employees of a company. Given the structure of private equity funds and general managers you are likely to catch entrepreneurial managers and not catch PE partners. Nice one.