“This kind of change would be crazy, a recipe for disaster and a real disincentive to the risk takers that we really need fired up and incentivised to get us out of this mess."
Robert Kilgour
Last week’s news of progress with Covid-19 vaccines is good news indeed: things could look very different in three months’ time. Western democracies have proved very vulnerable to this rampant virus, and our fortnightly check on mortality rates shows that the challenge is still very much with us.
But 2021 will be the year of recovery. It will also be the first direct exposure to life outside the European Union, since the transition agreement has preserved the status quo ante throughout 2020 - just as well.
So, it’s extraordinary to hear that HM Treasury mandarins are writing proposals to tax the guts out of entrepreneurs, by doubling Capital Gains Tax. In this commentary we turn to the domestic UK economy, and we suggest that the Chancellor should be looking harder at the experience of irredeemable Government bonds like War Loan 3½% to sort out his balance sheet, rather than plotting a fiscal kamikaze for the country.
The debate about Capital Gains Tax (CGT) has gone on for decades. The issue is whether, as the mandarins try to claim, a rate for CGT which is lower than income tax is an incentive for taxpayers to re-arrange their affairs in order to avoid tax, or whether it is a genuine encouragement for entrepreneurs to build new businesses and create employment.
When I first entered the City in the mid-1970s, you could see those re-arrangements visibly in, for example, the market prices for low coupon gilt-edged stocks. There was a 3–4% yield differential between them and their high coupon siblings, such that stockjobbers like Wedd Durlacher Mordaunt, for whom I worked, would short the low coupons and buy the high coupons: the yield differential was part of their normal trading profile.
Over the past 50 years, the opportunities to re-arrange tax affairs in order to provide this tax substitution have been demolished; for example, that yield differential between high coupon and low coupon short-dated gilts has been reversed. Even the proceeds from share buy-backs by companies are now treated as income rather than capital gain, and are taxed accordingly.
The mandarins, desperate for ways to raise £14 billion per annum in their pursuit of a 1970s–type reaction to the Covid-19 emergency public spending, are using this outdated argument as a smokescreen for a major tax grab on the 265,000 people who pay CGT. They are playing with fire.
Britain will need entrepreneurs desperately next year in order to pull us out of the economic challenges caused by Covid-19 and Brexit. As Robert Kilgour, a serial entrepreneur and founder of the Renaissance Care group of care homes, points out, we need people who are prepared to take risk in order to get the economy moving again. And as Roger Bootle of Capital Economics said recently “It’s Britain’s strivers and risk-takers who need help to survive the storm”. We absolutely don’t want them to move overseas, or sell up in advance of a huge rise in CGT.
So, Rishi Sunak needs to make clear, very soon, that he will not entertain such a daft policy. He needs to do so well before the Budget next March, because entrepreneurs will otherwise assume the worst and will not want to leave their decisions for last-minute.
What HM Treasury really needs to do is some serious forecasting of medium/long-term inflation. Because, if we are right in projecting continuation of the current extraordinarily low rates of interest and inflation for the next 5–10 years, the Bank of England - which now holds c. 50% of all government debt - needs to agree to cancel the extra Covid-19 emergency debt, as we proposed in our commentary on 13th July.
And that’s where War Loan 3½% comes in. This government stock, which was introduced in its irredeemable form in 1932 to fund the costs of the First World War, was classed as an irredeemable, although it was finally paid off in 2015 to be substituted by stocks with a lower coupon rate. When it was issued, it effectively cancelled that emergency government debt from 100 years ago - if we did the same now for Covid-19, the coupon cost would be close to zero in comparison.
So, Mr Sunak, stop the mandarins from dreaming up daft ideas which will cripple the British economy for years to come. Stop worrying about hyperinflation. Just prepare to cancel the debt by issue of a huge irredeemable loan stock to the Bank of England, let’s get our sleeves rolled up, and let’s get Britain working again next year.
We are so fortunate to be blessed with creative minds and abundant business energy. Let’s harness all that potential, let the entrepreneurs keep their returns which come from taking all that risk, and let’s get back to work again as soon as the vaccine allows.
Gavin Oldham OBE
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