This content is for information and educational purposes only. It should not be taken as financial advice or investment advice. To receive tailored, regulated financial advice regarding your affairs please consult us here at Hanson Financial Services (financial advice in Liverpool).
Capital gains tax (CGT) is the tax levied on an investment which you sell after it has made a profit. The rate you pay depends on your income tax band and the type of asset. In 2021-22, for instance, a basic rate taxpayer will pay 10% on profits from shares sold outside of allowances and ISA wrappers, whilst a higher rate taxpayer will pay 20%. CGT has been under the spotlight for some time now, with the UK government tasking the Office for Tax Simplifications (OTC) to try and find ways to simplify the system, streamline it and make it more efficient. This pressure has increased as authorities seek to find ways to raise more revenue to help pay down public debt exacerbated by COVID-19 – which stood at £355bn by the end of 2020-21.
For investors who may be looking to sell shares, property or other assets for profit in the future, CGT is an important factor to consider within their investment strategy. If possible, they will likely try to mitigate it by making use of an ISA, for instance. Yet how might CGT change in the future and potentially eat into an investor’s returns? Below, our financial planning team here at Hanson Financial Services in Liverpool explores some of the more plausible scenarios. Please note that the below is informed speculation. Please speak with a financial planner if you’d like to discuss your own investments and tax strategy with someone.
Moving CGT to income tax rates
In 2021-22, the CGT banks are lower than the income tax bands – regardless of whether you are disposing of a property asset, or non-property asset. For the former, basic rate taxpayers face a 20% CGT charge and a 10% charge on the latter. For people on the higher rate, the rates are 28% and 20%, respectively. However, this was not always the case. During the Thatcher years, for instance, both CGT and income taxes were the same for each band. Given this, some Conservative politicians have warmed to re-introducing this tax system due to the precedent. Yet it does not appear to have gathered significant support at the time of writing.
Cut the annual CGT allowance
One of the ways to mitigate a CGT bill in the present tax year is to use your CGT-free annual allowance. This allows you to make £12,300 in gains – outside of an ISA – each financial year before you need to pay CGT (excluding certain exempt assets such as your residential property or EIS shares held for at least three years). One suggestion by the OTS has been to reduce the annual CGT allowance from £12,300 to £5,000 – a move which could increase the number of people paying CGT by 100%. However, bringing in such a measure would take time and so the amount of tax it would raise in the long term is questionable. Many investors are likely to simply sell their gains before the new rules are introduced, to minimise their CGT exposure.
Tax people on their homes
For a long time now, homeowners have not been charged CGT when they sell their residential property. One idea (not suggested by the OTS) would be to abolish this exemption. However, this is unlikely to gain any traction anytime soon in the Treasury given the political outcry and disruption to the property market this would likely cause.
Change inheritance tax
In early 2020, a cross-party group of MPs proposed that inheritance tax (IHT) should be lowered to 10%. To simplify the system, moreover, they called for a curb on reliefs and an abolition of the “7-year rule”, which allows gifts to be exempt from an estate – for IHT purposes – if the owner of the estate dies 7 years later. Whilst this proposal has not been adopted by the government, it is likely that doing so would have a knock-on effect on CGT and any proposed changes to it.
Currently, some people make gifts to loved ones because they would rather pay CGT ranging from 10-28% than pay 40% IHT. Lowering the IHT rate to 10% (as suggested by the cross-party group of MPs) and leaving CGT unchanged, therefore, could lead to more tax revenues raised later by IHT. Whilst this idea has its merits, it is unclear whether it will be seized upon by the UK government which is exploring ways to raise tax revenues in the shorter term (to help pay down public debt from COVID-19 before the next general election).
Conclusion & invitation
As you can see, there is no clear option, at present, for the government to reform CGT and gain more revenue for the Treasury’s coffers. Investors will likely see this as good news for their own portfolios, although the landscape could change significantly within the coming years. Working with a financial planner can help you keep your ear to the ground and plan for such changes.
Are you interested in talking to a financial adviser about your pension and investment planning needs? We’d love to assist you here at Hanson Financial Services.
Please contact us to arrange a consultation with our team – free and without obligation – to gain more clarity and peace of mind over your financial plan.
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