President Joe Biden’s plans to nearly double the rate of capital gains tax for the US’s highest earners caused shockwaves in America — and sent ripples of concern around the world.
Tax experts in the US and Europe predict other governments could seek to copy the proposals Biden announced last week and raise capital taxes on the wealthiest to shore up their own public finances in the wake of the pandemic.
For Americans earning more than $1m annually, Biden wants to raise the top CGT rate to 39.6 per cent from 20 per cent. This would reach 43.4 per cent when coupled with an existing surtax on investment income.
“To double CGT is utterly seismic,” said Daniel Hyde, a partner at UK accountancy firm Blick Rothenberg. “It opens the door to everyone else around the world, as this is the first major developed country to go hard on CGT.
“CGT is a hot potato in the UK, but one the government didn’t show their hand on in the Budget. This potentially does set a precedent for them to follow.”
Rachael Griffin, tax and financial planning expert at Quilter, the wealth manager, expects UK CGT rates to be raised to the same rates as income tax at the autumn statement.
This would eliminate a discount and return to the position before 2008, when CGT was charged at income tax rates. “Bad news is coming in the autumn,” Griffin said.
Kate Barton, EY’s global vice chair of tax, added that the Biden plan contained two key trends that were also developing in other industrialised nations, particularly in Europe.
First, governments are seeking to balance stimulus support packages with revenue raising focused on tax rises on the so-called “ultra-rich”.
Second, there is a growing interest in redistributing wealth through taxation to improve social inequalities that have deepened during the pandemic.
“During the pandemic the rich got richer and the poor poorer,” Barton said. “The question Biden is asking is ‘how do I redistribute wealth to the poorest’ [and he’s decided] to go after the 1 per cent of the population, tax them more and through the government spend more. That’s not unique to the US.”
Most countries have a difference between the rate at which income tax is charged and CGT is levied, according to David Linke, global head of tax and legal services at KPMG. He said the US administration’s approach might “invite discussion on whether gains from capital assets and labour income should be treated similarly in the future”.
Tax activists calling for greater social equality welcome the shift. “Taxing income from wealth and work at the same rate makes economic and political sense,” said Robert Palmer, executive director of Tax Justice UK, a campaign group. “It’s perverse that a hedge fund manager can pay a lower tax rate than his cleaner.”
However, it is by no means certain that countries outside the US would follow in Washington’s footsteps. Some professionals believe that other nations might react to the US’s planned CGT hikes by making their own tax regimes more attractive to wealthy Americans, perhaps using special schemes for foreigners classed as non-domiciled [non-dom] for tax purposes.
The Tax Foundation, a US think-tank, reports that increasing the top CGT rate to 43.4 per cent would mean those earning more than $1m a year would face total tax rates of more than 50 per cent on capital gains, when state taxes are included.
Hyde said: “Senior executives in fund management industry, especially in New York City, may find these rates untenable and may look to London as an attractive alternative especially in light of the [UK’s] non-dom regime. Of course, a move to London doesn’t remove the [US] federal tax, but 43.4 per cent may still look a lot more attractive than nearly 55 per cent and even the threat of higher UK taxes could still place London as a possible destination.”
The US is unusual because its authorities can impose federal taxes on its citizens wherever they live. Tax experts say they expect to see more inquiries from wealthy American expats about renouncing their citizenship if the mooted CGT proposals are passed. Hyde reports he has already had some queries.
But renouncing US citizenship is “not a step to take lightly,” said Mike Hayes, a tax partner at Moore Kingston Smith, an accountancy firm. Those who do, and have worldwide assets worth more than $2m, face an exit tax or “‘expatriation charge”.
“You are taxed as though you have sold all those assets at market value and you pay US tax on the gains,” Hayes explained. “This can make expatriation very expensive and those with very large gains will be hit the hardest.”
Instead, tax experts predict that wealthier Americans are either more likely to crystallise gains before the new regime is introduced to pay under the old system, or hold on to assets for longer when the higher taxes are brought in.
It remains to be seen whether the measures, if enacted either in the US or elsewhere, will substantially increase the tax take, according to Marvin Rust, head of tax at the London office of US professional services firm Alvarez & Marsal. He said: “It’s a complicated puzzle with lots of parts and the difficulty is predicting people’s behaviour.”