Laith Khalaf, head of investment analysis at AJ Bell, has been reflecting on today’s changes to capital gains tax announced by Rachel Reeves in her first budget as he comments:
“The chancellor says she wants to invest, invest, invest, but at the same time, she’s going to tax you more if you decide to follow her mantra. Increased rates of capital gains tax will hit share investors and business owners where it hurts. Higher rates discourage risk-taking and investing in shares, and somewhat bizarrely, the biggest increase in capital gains tax has been reserved for basic rate taxpayers. Higher rates of capital gains tax deter consumers from investing in growth assets, potentially depriving them of higher long-term returns, while at the same time undermining demand for the UK stock market.
“Nonetheless, given some of the rumours doing the rounds ahead of the Budget, hikes to capital gains tax could have been much more draconian, so there will be some measure of relief, especially among landlords and second homeowners who escape hikes altogether. But the chancellor giveth and the chancellor taketh away, and higher rates of stamp duty for second homes will deter landlords from expanding their empires and may mean second homeowners find it more difficult to sell their properties. Business owners will likely take a dim view of the changes, because even though the chancellor has maintained Business Asset Disposal Relief, they still face higher rates of CGT from now on.
“Some will say capital gains tax is only paid by wealthier individuals, and undoubtedly there are some CGT taxpayers who aren’t exactly short of a bob or two. However not everyone who pays CGT travels around on a private jet, and many have simply made prudent financial provisions for their future. More small shareholders are now liable to capital gains tax as a result of the previous government’s decision to cut the annual CGT allowance from £12,300 to just £3,000, which now compares very unfavourably to the £12,570 tax-free personal allowance for income. For most people capital gains build up on assets purchased with money that has already gone through the income tax wringer, so capital gains tax represents a second wave of taxation.
“The decision to increase capital gains tax for basic rate taxpayers by more than the hike for higher rate taxpayers also seems odd for a government focused on working people, especially as it could well impact many modest earners in company Save As You Earn (SAYE) schemes. As we have seen though, the formulation of ‘working people’ is sufficiently woolly to cover up a number of apparent transgressions.
“The chancellor has missed a bit of a trick by introducing hikes to capital gains tax immediately rather than from April. Giving advance notice of a tax rise would have resulted in assets being sold off before then, and a short-term boost to Treasury coffers. The immediate introduction of higher rates will at least mean there is no downward pressure on asset prices as investors look to offload their investments before a deadline next year.
“It’s worth noting that capital gains tax can get fiendishly complex where regular investments and divestments are made, and where returns come via a combination of income and gains. This is a fairly common occurrence. The fact more small shareholders are going to get caught in the capital gains tax net as a result of the lower annual tax-free allowance means they will have to front up to this complexity on relatively modest sums. Rachel Reeves’ latest hike to CGT means they’ll also be left with less money in their pocket after they’ve mastered the complex calculations to arrive at their precise liability.
“The good news is stock market investors can reduce their capital gains tax liability through the use of pensions and ISAs, an arrangement which the chancellor has thankfully left untouched. Gains made within these tax shelters aren’t subject to capital gains tax, and dividends and interest are also free from income tax to boot. Current pension and ISA allowances are probably enough to protect most people’s investments from the ravages of capital gains tax, provided they use them. Those who have recently withdrawn money from their pension as a result of rumours about a raid on tax-free cash may find themselves limited in how much they can put back into a pension though, and could therefore be paying capital gains tax further down the line if they now reinvest the withdrawn funds in shares outside the tax shelter.”
