Capital Gains Tax – Is an Increase on the Way?

One of the most frustrating things we encounter whilst helping clients secure their futures, is governments changing the rules.

It’s a bit like you when play a game of football, and at half time with a comfortable 2-0 lead, the referee explains that the goal size of your opponents will decrease, whilst yours will double.


Hey ref, that’s not fair!

Well, in the world of financial planning, and no doubt along with millions of taxpayers, we await the budget announcements with bated breath. Just as Gordon Brown (remember him?) hit pension funds with his smash and grab back in 1997, the new government are formulating the changes to the tax system to be announced next month.

Now, let’s be clear. Action needs to be taken to reduce the massive deficit. No argument here. Spending cuts are needed, and tax rises will have to come.

However, what we hear from clients is that they are in many cases bitter that due to other peoples mistakes, Banks and Politicians et al, they are as usual picking up the bill.

For those earning above £100k pa, and particularly £150k pa, income tax rises will be painful this year. We are likely to also see VAT rates rise, so if you fancy a plasma TV for the world cup you may want to get cracking.

One of the other tax rises that could well have massive implications for many is Capital Gains Tax (CGT). This is where if you buy shares or a second property for example, you pay tax on the gain you make.

The rules and rates have already been altered in recent years, and now most commentators predict large changes yet again, possibly in line with income tax rates.

Hey ref, that’s not fair!

So what are the changes likely to be? We do not have a crystal ball, however some possible options are:

  • Increase the capital gains tax rate from a flat 18% to your individual rate of tax of 20/40% or even 50%
  • Reduce the annual allowance on which you pay no tax from £10,200 or abolish this allowance altogether
  • Bring in any changes retrospectively

If rates are increased in line with income tax rates, then the situation will revert to how it was before it changed a few years ago.

This was the stick, and the carrot was that the longer you held an investment the more ‘discount’ you received on these rates (indexation allowance). So a long term investor was rewarded, but a short term speculator was not.

So if rates are increased and no ‘discount’ is brought in for the length of time you have held the investment, then this is likely to have huge ramifications.

Imagine if Osborne stands up to make his budget speech next month and announces that CGT rates are to rise next April, and that there would be no indexation allowance. So if you sold your Buy To Let by then you would pay 18% tax on any gain, but after then you would be hit at a rate of 40% or even 50%.

The amount of new property suddenly coming onto the market could be huge, depressing prices further with buyers also playing the game knowing the deadline date.

Some have even called for CGT to be introduced on principal residences! So even if you sold your own home you would be heavily taxed! If you are planning to rely upon downsizing to fund your retirement this would be a massive blow.

Clients with equity portfolios would also have their profits hit, and this could well have the effect of depressing the whole stock market with less incentive to save.

By Amber