Backbenchers' revolt succeeds in watering down reforms to CGT

A controversial rise in capital gains tax to pay for an increase in the income tax threshold will be announced in next week's Budget, David Cameron confirmed yesterday.

The coalition government's initial proposals to raise CGT from 18 per cent to 40 or even 50 per cent provoked uproar among Tory MPs who accused ministers of penalising savers. The Liberal Democrats had championed the proposal, which the party claimed would raise £1.9bn a year, as part of a package of plans to lift people earning less than £10,000 a year out of income tax.

But the Conservative backbench protests forced ministers into a rethink of the policy ahead of next Tuesday's Budget announcement by Chancellor George Osborne.

They are known to be considering a tapering system under which people who try to make quick profits are penalised, but those who hold long-term assets are not affected.

Mr Cameron insisted yesterday that the government had to act to stop many top earners trying to reduce their tax bill by receiving income in other forms than cash.

The Prime Minister confirmed that the Treasury believed more than £1bn was being lost to the Inland Revenue as a result.

"We are finding a lot of people turn income into capital in order to evade the tax system and we're losing over £1bn by that. So there's a problem we have to address," he told BBC Radio 2's Jeremy Vine show. "But I do not want to do anything that actually unfairly punishes savers – I don't want to go back to very high rates of marginal tax."

Mr Cameron confirmed that the Budget would include changes to CGT that yielded extra income for the Treasury – and that the cash would be used to raise the income tax threshold. It is likely that the government will only announce a slight increase in the current allowance of £6,475, but promise further progress towards £10,000 in subsequent years.

The Prime Minister said the Government planned to raise "some modest additional revenue" from CGT. It would be used to "fulfil one of the coalition's pledges, which is to lift the income tax threshold for all basic rate taxpayers, so you don't start paying income tax until a bit later."

He added: "I think that's a good thing to do to take poor people out of tax."

The Prime Minister reiterated that the Budget, which will set the Government's overall expenditure limits, and the spending review in the autumn, would contain unpalatable measures to reduce the national deficit and signalled that pay, public sector pensions and benefits would all be scrutinised for savings.

Earlier the Prime Minister had reassured Graham Brady, the chairman of the 1922 committee of Tory backbenchers, that the Budget would not punish savers. He said: "We have got to make sure that, in what we do, we help those who try to do the right thing, to save and to look after themselves and their families."

Mr Osborne confirmed last night that the government intended to press ahead with plans for a banking levy and would demand "further restraint" by the financial institutions on pay and bonuses. Details will be spelt out in the Budget.

Delivering the annual Mansion House speech, the Chancellor promised that the previous government's system for regulating the City would be dismantled.

The Financial Services Authority (FSA) will cease to exist in its current form and its regulatory powers handed to the Bank of England.

He disclosed that Hector Sants, who had announced his resignation as chief executive officer of the FSA four months ago, would remain after all to oversee the transition and become the first chief executive of the new regulator.

Mr Osborne said: "The plan I have set out tonight represents a new settlement between our banks and the rest of our society, a fairer settlement in which the banks support the people, instead of the people bailing out the banks."

He also announced the appointment of Sir John Vickers, former chief economist to the Bank of England, to chair a commission on the future of the banking industry.

Vince Cable, the Business Secretary, said: "The banking sector failed to deliver sustainable, balanced growth to the wider economy. Instead it acted as an agent for a massive increase in instability, the costs of which were unfairly borne by ordinary businesses and taxpayers."

Q&A: The rules

What is capital gains tax?

The tax paid on the profit from the sale of any asset, such as shares, land or property. It is currently charged at 18 per cent of profits above £10,100.

Who pays it?

Anyone who makes a profit on a second home, a buy-to-let property, shares or expensive items they inherit. Some windfalls are exempt, including cars, lottery and betting wins and stocks and shares in tax-free investment savings accounts, such as ISAs.

What is the problem?

Critics protest that the wealthy are often paid in the form of other goods to avoid being liable for the 40p or 50p top rates of tax. Typically they could receive shares, but there are other examples of employees receiving bonuses of expensive gifts rather than cash. They are tax-free if worth under £10,100 – and only taxed at 18 per cent above that level.

How much does it raise?

£8bn a year, depending on shifting property prices and volatility in the stock market. It is paid by about 130,000 people a year.

What did the Liberal Democrats propose?

Taxing capital gains "at the same rates as income" – in other words, at 40 per cent or 50 per cent. They calculated that the Treasury would raise an extra £1.92bn a year as a result.

What did the coalition suggest?

To tax "non-business capital gains at rates similar or close to those applied to income", with exemptions for entrepreneurs.

Why did many Tory MPs react in horror?

They fear that it could act as a disincentive to prudent savers – such as people who invest in second homes – and risk-taking entrepreneurs.

What could the compromise be?

Introducing a tapering scheme under which, for example, a rate of 30 per cent is imposed on gains over two years, 20 per cent for three years and 10 per cent for four years. There used to be a tapering system until 2008.

Nigel Morris

Suggested Topics
A model of a Neanderthal man on display at the National Museum of Prehistory in Dordogne, France
Dawkins: 'There’s a very interesting reason why a prince could not turn into a frog – it's statistically too improbable'
newsThat's Richard Dawkins on babies with Down Syndrome
Arts and Entertainment
Eye of the beholder? 'Concrete lasagne' Preston bus station
architectureWhich monstrosities should be nominated for the Dead Prize?
Have you tried new the Independent Digital Edition apps?
ebooksAn evocation of the conflict through the eyes of those who lived through it
Arts and Entertainment
Life and Style
This month marks the 20th anniversary of the first online sale
techDespite a host of other online auction sites and fierce competition from Amazon, eBay is still the most popular e-commerce site in the UK
Arts and Entertainment
Travel Shop
the manor
Up to 70% off luxury travel
on city breaks Find out more
Up to 70% off luxury travel
on chic beach resorts Find out more
sardina foodie
Up to 70% off luxury travel
on country retreats Find out more
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs General

Quantitative Analyst (Financial Services, Graduate, SQL, VBA)

£45000 per annum: Harrington Starr: Quantitative Analyst (Financial Services, ...

Application Support Engineer (C++, .NET, VB, Perl, Bash, SQL)

Negotiable: Harrington Starr: Application Support Engineer (C++, .NET, VB, Per...

C# .NET Software Developer (Client-Side, SQL, VB6, WinForms)

Negotiable: Harrington Starr: C# .NET Software Developer (Client-Side, SQL, VB...

C# Developer (Genetic Algorithms, .NET 4.5, TDD, SQL, AI)

£40000 - £60000 per annum + Benefits + Bonus: Harrington Starr: C# Developer (...

Day In a Page

Middle East crisis: We know all too much about the cruelty of Isis – but all too little about who they are

We know all too much about the cruelty of Isis – but all too little about who they are

Now Obama has seen the next US reporter to be threatened with beheading, will he blink, asks Robert Fisk
Neanderthals lived alongside humans for centuries, latest study shows

Final resting place of our Neanderthal neighbours revealed

Bones dated to 40,000 years ago show species may have died out in Belgium species co-existed
Scottish independence: The new Scots who hold fate of the UK in their hands

The new Scots who hold fate of the UK in their hands

Scotland’s immigrants are as passionate about the future of their adopted nation as anyone else
Britain's ugliest buildings: Which monstrosities should be nominated for the Dead Prize?

Blight club: Britain's ugliest buildings

Following the architect Cameron Sinclair's introduction of the Dead Prize, an award for ugly buildings, John Rentoul reflects on some of the biggest blots on the UK landscape
eBay's enduring appeal: Online auction site is still the UK's most popular e-commerce retailer

eBay's enduring appeal

The online auction site is still the UK's most popular e-commerce site
Culture Minister Ed Vaizey: ‘lack of ethnic minority and black faces on TV is weird’

'Lack of ethnic minority and black faces on TV is weird'

Culture Minister Ed Vaizey calls for immediate action to address the problem
Artist Olafur Eliasson's latest large-scale works are inspired by the paintings of JMW Turner

Magic circles: Artist Olafur Eliasson

Eliasson's works will go alongside a new exhibition of JMW Turner at Tate Britain. He tells Jay Merrick why the paintings of his hero are ripe for reinvention
Josephine Dickinson: 'A cochlear implant helped me to discover a new world of sound'

Josephine Dickinson: 'How I discovered a new world of sound'

After going deaf as a child, musician and poet Josephine Dickinson made do with a hearing aid for five decades. Then she had a cochlear implant - and everything changed
Greggs Google fail: Was the bakery's response to its logo mishap a stroke of marketing genius?

Greggs gives lesson in crisis management

After a mishap with their logo, high street staple Greggs went viral this week. But, as Simon Usborne discovers, their social media response was anything but half baked
Matthew McConaughey has been singing the praises of bumbags (shame he doesn't know how to wear one)

Matthew McConaughey sings the praises of bumbags

Shame he doesn't know how to wear one. Harriet Walker explains the dos and don'ts of fanny packs
7 best quadcopters and drones

Flying fun: 7 best quadcopters and drones

From state of the art devices with stabilised cameras to mini gadgets that can soar around the home, we take some flying objects for a spin
Joey Barton: ‘I’ve been guilty of getting a bit irate’

Joey Barton: ‘I’ve been guilty of getting a bit irate’

The midfielder returned to the Premier League after two years last weekend. The controversial character had much to discuss after his first game back
Andy Murray: I quit while I’m ahead too often

Andy Murray: I quit while I’m ahead too often

British No 1 knows his consistency as well as his fitness needs working on as he prepares for the US Open after a ‘very, very up and down’ year
Ferguson: In the heartlands of America, a descent into madness

A descent into madness in America's heartlands

David Usborne arrived in Ferguson, Missouri to be greeted by a scene more redolent of Gaza and Afghanistan
BBC’s filming of raid at Sir Cliff’s home ‘may be result of corruption’

BBC faces corruption allegation over its Sir Cliff police raid coverage

Reporter’s relationship with police under scrutiny as DG is summoned by MPs to explain extensive live broadcast of swoop on singer’s home