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Picture 17 Jamie
Murray Wells is founder and Executive Chairman of Glasses Direct, the
world’s largest online retailer of prescription glasses.

When Capital Gains Tax is low (or better absent), higher-risk investments in young, growing companies may have an attractive risk-profile and investments may be profitable. Complicated calculations about whether they will be worth it after tax are avoided. Capital allocation is dynamic and efficient: small, growing companies raise capital easily in the stockmarket and investors hope to make a good return on their risk money.

The market is working, and incentivised towards, general prosperity. Tax reduces private investment which is the sole producer of wealth.

Conversely, when CGT is high, the market is seriously distorted. Ordinary stock market investors are incentivised away from risk. Already I find myself considering altering my buying/selling strategy in small holdings I own to suit the tax regime rather than those growing companies needs – which cannot be a good thing.

Investors like me re-allocate capital to safe, lower-return, 'hold for ever if I can' companies because they want to avoid or limit crystallising a gain (in some cases forever) which will be subject to high taxation. Investment subjects become plodders beyond their sell-by date. Capital once directed to worthy, undervalued companies remains there when they no longer need it, while it is denied companies more deserving and which offer a much better return before tax. The economic structure of the country suffers. Equally, money that may be re-cycled into private companies like mine, never quite makes it because it remains stagnant in the markets.

Under this depressing scenario, private investors find themselves no longer free individuals making responsible choices but are instead forced to act against their best interests. Identifying value, and acting on it regardless of the period of the investment, is obviously routine action for fund managers and many fine investors, including that role model of long-term investing, Warren Buffett, who would no more ignore an outstanding sudden opportunity than drink Pepsi Cola.

Yet for a private investor do so is apparently the worst kind of behaviour. It is held that private investors should be forced into long-term investments. That long-term investments are a very good idea does not make this coercion valid. Holding that private investors should be treated like children and have their investment choices dictated to them is not a respectable position – and certainly should not be a Conservative position.

Smaller investors lacking information on generalised managed fund (as opposed to ETF) returns against their index over a realistic investment timescale (say 15 years or more) will tend to be directed by IFAs and the press into sub-par investments where their compounded return will be at the mercy of compounded fees, while larger private investors must also divert their capital into poorer investments which they can hold.

Such has been the scare of high CGT, and so supinely encouraging to the new government to enact it has been the press response, that the process of transferring assets from the productive to the less-productive has been underway for some time. It is probable that funds investing in Asia have been the gainers from the new impossibliity of investing in anything which might have to be sold.

Not only does CGT distort the market for capital by affecting the natural return and destroying the initiative of investors, and thereby diminishing the capital available to young businesses. It also keeps in employment a vast workforce (HMRC, accountants, lawyers) who could be doing something much more productive in the economy than enforcing it or working out ways of avoiding it.

CGT should not be raised. It should be abolished.

22 comments for: Jamie Murray Wells: Raising Capital Gains Tax would punish those investing sensibly for their future

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