Chancellor John Healey is under pressure to raise capital gains tax (CGT) again, with Labour MPs and left-wing think tanks urging dramatic increases. If rates are hiked, around half a million Britons every year could face significantly larger bills.
Pressure Mounts for CGT Increase
CGT is charged on gains from assets such as shares held outside an ISA, antiques, bitcoin, businesses and properties other than your main home, including second homes, rentals and holiday properties. The tax has already become more punitive after the Tories cut the annual allowance from £12,300 to £3,000, and former chancellor Rachel Reeves raised the main CGT rates to 18% for basic-rate taxpayers and 24% for higher-rate taxpayers.
Many in Labour want to go further, by increasing CGT rates to 20%, 40% and 45%, bringing them into line with income tax. Labour donor Dale Vince has suggested equalising CGT with income tax could raise £14billion, but HMRC's own modelling suggests a CGT hike could actually reduce the tax take by several billion.
Behavioural Impact of Higher Rates
Sarah Coles, head of personal finance at AJ Bell, said many people will change their behaviour if CGT rates rise and hoard assets rather than sell them, either until their income drops or even until death, when currently there is no CGT to pay. Coles said this can backfire. “It could lead them to hang onto investments that don’t suit their needs, resulting in poor financial outcomes.”
There are other issues. Investing or setting up a business is high risk, but now the rewards would be lower, Coles said. “The government is keen to encourage more people to invest, so steps that make it less attractive seem counterintuitive.”
Steps to Protect Yourself
Acting on pre-Budget speculation is always dangerous, as we have no idea what Healey will do until October 28. So don't panic and sell up. Time is short anyway, especially when selling bigger assets like properties. If worried, consider taking independent financial advice. And there are some simple things you can do now.
1. Use your £3,000 CGT exemption. If you’re sitting on gains, consider whether it makes sense to realise some before the Budget to use this year’s allowance.
2. Use an ISA. Investments inside a Stocks and Shares ISA are sheltered from CGT, so consider using your £20,000 annual allowance.
3. Consider pensions. Investments inside a pension aren’t subject to CGT, although from next April they become liable to inheritance tax. So there's a risk you save on one tax, but lose on another. Advice may be required.
4. Use any losses. Capital losses can be offset against gains, reducing the amount of CGT you pay.
5. Plan as a couple. Married couples and civil partners can generally transfer assets between themselves without triggering CGT, allowing both partners to use their £3,000 annual exemptions and ISA allowances.
CGT used to be called the forgotten tax but that looks set to change. Check out what you can do today, but resist the temptation to panic. This may still not happen.
