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Business alliance warns CGT increase could hinder recovery

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A group of leading business owners has urged the government to reconsider plans to introduce a large rise in capital gains tax.

The Supper Club consists of a number of fast-growing businesses.

In a letter to the Chancellor, the group argued that a significant increase in the rate at which CGT is charged could hamper economic growth and job creation.

The letter said: “We are seriously concerned about the consequences of a potential outright increase to CGT on the ability of this country to move back into sustained economic growth.

“Although the increase in CGT rate may not apply to business assets, the lack of clarity over what constitutes ‘business assets’ means that the staff of thousands of businesses currently holding shares or options in the companies for whom they work may also be adversely affected.”

The government has indicated its intention to push up CGT rates so that they are closer to higher rate income tax.

Similar concerns were expressed by the think-tank, the Adam Smith Institute.

Richard Teather, a fellow at the Institute, claimed that increases in CGT can lead to a drop in business and economic activity.

He estimated that the cost to the UK economy of raising CGT to 40 per cent would come to a figure between £3.2 billion and £5.2 billion, involving a shedding of some 61,000 jobs.

Dr Teather said: “An increase in capital gains tax increases the cost of raising capital for business. Investors expect higher returns and therefore businesses have increased costs and less capital.

“This leads to less production and a lower demand for workers, therefore increasing unemployment.”

Nick Clegg, the Deputy Prime Minister, hinted in a BBC radio interview that the government may be prepared to reach a compromise position on CGT, suggesting that both tapering – the graduated reduction of the rate chargeable – and indexation – taking the rate of inflation over the period during which an asset has been held into account – may be possibilities.

Mr Clegg said: “It is impossible to start picking off whether you believe in tapering, in whether you believe in indexation – so you don’t tax the increase of the value of assets through inflation because you have to couple that with the consideration of what rates you use. All of those things will be considered.”

However, Mr Clegg reiterated that some form of increase was necessary in order to prevent people claiming income as a short-term capital gain and so paying a lower rate of tax.

He added: “I also philosophically want to see a tax system that over time rewards work and initiative and enterprise and doesn’t just reward, or reward disproportionately, unearned wealth.”