Page last updated at 22:39 GMT, Thursday, 27 May 2010 23:39 UK

Capital Gains Tax: No coalition split says Vince Cable

Business secretary Vince Cable explains the thinking behind the suggested increase in capital gains tax

Business Secretary Vincent Cable has insisted the coalition government is not split over planned increases to non-business capital gains tax.

The move could see second home sales taxed at a rate of 40% or 50%.

Senior Tory MPs have attacked it as a tax on the middle classes and a betrayal of Conservative values.

But Mr Cable told BBC News it was a "key" part of the coalition deal and there was no disagreement over it between the Lib Dem and Tory partners.

Mr Cable, who has stood down as Lib Dem deputy leader, said the changes to capital gains tax would help to fulfil the Lib Dem aim of bringing more "fairness" to the tax system.

He told the BBC: "It's very important that we have wealth taxed in the same way as income.

"At present it is quite wrong and it is an open invitation to tax avoidance to have people taxed at 40% or potentially 50% on their income, but only taxed at 18% on capital gains; it leads to large scale tax avoidance so for reasons of fairness and practicality, we have agreed that the capital gains tax system needs to be fundamentally reformed."

'Punishing the virtuous'

Non-business capital gains tax is a tax on the profit or gain you make when you sell or "dispose of" an asset, such as a second home or shares.

The aim of the proposed changes is to prevent people diverting their income into these types of assets in order to pay lower levels of tax.

But there are fears that the move would cause a "fire sale" as property investors try to offload their assets before the new higher rate of tax is implemented.

Senior Conservative MPs, such as David Davis, also fear the increase will penalise people who have invested in property or shares for their retirement.

Far from taxing the rich, it will simply tax the elderly at their point of maximum vulnerability - when they enter retirement
David Davis, Conservative MP

In an article for the Daily Mail, Mr Davis said increasing the tax risked "punishing the virtuous" and "destroying aspiration".

"It will penalise hard work and saving. Far from taxing the rich, it will simply tax the elderly at their point of maximum vulnerability - when they enter retirement," wrote the former shadow home secretary.

Critics also claim that increasing non-business capital gains tax (CGT) too much will actually lead to a reduction in tax receipts as people put their money into other kinds of investment or find ways of avoiding it.

"Unless it is very carefully designed, the plan to increase CGT will not only fail to raise the money needed, it will cost money," added Mr Davis - citing evidence from the US.

But Mr Cable dismissed Mr Davis's argument, saying: "I don't accept the way he puts it. I don't think there are terribly many people who he describes as working class who get very large capital gains."


And he insisted there was no real disagreement at the top of government over the changes, which will be announced by Chancellor George Osborne in next month's budget.

"It's not actually an argument between the coalition partners, as I understand it, it's an argument between a few Conservative backbenchers and others," he added.

Team Cameron re-wrote Tory tax plans behind closed doors in a matter of days without consultation with the party in order to seal the coalition deal
Nick Robinson, BBC Political Editor

He also dismissed Tory MP John Redwood's proposal to make the tax much lower if an asset has been held for a long time, saying that would be a return to a system that had to be abandoned by the previous Labour government "because it didn't work".

Mr Redwood told the BBC's Question Time that he wanted "an intelligent conversation" about the issue and hoped the government would listen to his concerns that the tax rise would "clobber" people on average incomes, discourage savers and not bring in as much revenue as anticipated.

He denied he was a "rebel" but said there should be an "open debate" before the policy was fixed.

Prime Minister David Cameron urged backbench critics to wait for the budget on 22 June and insisted all of their arguments were being taken into account.

He said a higher rate was needed to raise the "modest" sums needed to pay for income tax cuts for low and middle earners as part of the coalition deal with the Liberal Democrats.

He refused to be drawn on whether the changes would include safeguards to protect people who had invested for their retirement but he stressed that entrepreneurs would be protected, telling BBC Radio 4's Today programme: "We need a country that really fires up entrepreneurship."

'No rebellion'

Work and Pensions Secretary Iain Duncan Smith also sought to reassure backbench Tory MPs that their concerns were being listened to.

He said: "I have to say that my own colleagues should worry less and listen more, because I think you'll find that George Osborne is not the sort of person that's going to do any damage to the British economy."

Mr Redwood insisted he was not leading a backbench rebellion against the proposals to cause trouble for the coalition government.

He told the BBC News Channel: "We are not talking about a rebellion, we are talking about helping the government shape an interesting new policy."

He said he backed Lib Dem calls to extract more tax from the rich but said it could only be achieved by setting "competitive rates" - such as those he proposed in a letter to the Treasury on Wednesday - rather than "penal rates".

"Let's go with the Liberal Democrats to show willing that we can have a higher rate for short-term gains, but let's not tax those who create jobs, who take risks and who save for their retirement," he added.

Print Sponsor

Has China's housing bubble burst?
How the world's oldest clove tree defied an empire
Why Royal Ballet principal Sergei Polunin quit


Americas Africa Europe Middle East South Asia Asia Pacific