Merge inheritance tax and capital gains tax, says Institute of Directors

Capital Gains tax and inheritance tax should be merged to prevent wealthy homeowners being taxed twice, IoD suggests

Capital gains tax and inheritance tax should be merged to prevent wealthy homeowners being taxed twice, according to the Institute of Directors.

Taxes raising less than £5billion a year should be merged or scrapped, the IOD also suggests, in a policy welcomed by Tory manifesto chiefs.

In a pre-election analysis, the Institute said that the “monstrous” tax system should be reformed, in order to minimise the cost of collecting taxes and ensure that businesses are able to operate free of complex layers of taxation.

John Redwood, who is the chairman of the Conservatives’ Parliamentary Economic Affairs Committee which will have a central role in drawing up the Tory manifesto, said that it was crucial to ensure that that taxes were “efficient and cheap” to collect.

Under the IoD’s proposals, the repeal or merger could affect stamp duty on shares, which raises £3billion a year and capital gains tax, which brings in £5billion. Inheritance tax, which raises £5billion a year, would be scrutinised.

“It is a good question to ask because some taxes raise a small amount and have a high cost of collection,” said Mr Redwood.

“With tax, you should ask two questions, the one that the IoD asks here, which is ‘is it efficient and cheap?’ and, if we’re going to have the tax, ‘are we setting it at the right level to maximise revenue?’”

Mr Redwood said that some taxes should be retained even if they brought in relatively low figures, because they had a social benefit.

However, he said that other taxes were set counteractively high and should be reduced to ensure effective tax receipts.

“CGT, for example, is set at too high a rate to maximise revenue,” he said. “At 28 per cent, it’s bringing in half the amount it brought in when it was at 18 per cent before the slowdown, because better off people look at it and sit on assets instead of selling them.”

In a new paper, Priorities for Tax Reform, the IoD has identified Labour’s Mansion Tax plans and the Coalition government’s Diverted Profits Tax as new taxes that could create “undesirable and unforeseen consequences”.

The Diverted Profits Tax, nicknamed the Google Tax, will target multinationals’ shifting profits away from the British jurisdiction to lower tax countries.

City lawyers and accountants have warned that the Government is likely to face expensive court battles over the subjective test of what count as artificially diverted profits.

“The basic principles here are that taxes should be focused purely upon the fiscal revenues collected and their wider economic impact. They should not be confiscatory, punishing or unduly complex,” said the IoD’s Head of Taxation, Stephen Herring.

The IoD also wants a triple lock on tax thresholds introduced, which would stop fiscal drag. Under their proposals, tax bands would increase each year by the highest of consumer price inflation, earnings growth or 2.5% per annum.

“Simplification should be the watchword, ” said Mr Herring, adding that the Treasury should avoid “thinking up ever more complex exemptions, rules, distinctions and definitions”.

The IoD, which has 35,000 members across the spectrum of UK business, also said that “authentic” tax planning should not be stigmatised as tax avoidance.