- In his Budget submission, Labour donor Dale Vince has become the latest to call for an equalisation of the capital gains tax rate and the income tax rate
- Previously this idea has been championed by the IFS, IPPR and the Office for Tax Simplification, and was proposed by Wes Streeting as part of his leadership bid
- Currently CGT is charged at 18% for basic rate taxpayers and 24% for higher and additional rate taxpayers
- Why equalising CGT with income tax may not drive an increase in tax revenue and could impact investor behaviour
- Five ways to save capital gains tax
- A brief history of capital gains tax and how it works
Sarah Coles, head of personal finance at AJ Bell, comments:
“Capital gains tax rules and allowances aren’t written in stone. In fact, given the number of changes over the years, they may as well have been written in chalk. For the past few years, the debate has raged as to whether rates ought to be the same as those on income. One party donor called for it in his Budget submission, which has reignited the debate.
“It’s vital not to assume this is nailed on. Despite calls for this change since at least 2010, higher rate taxpayers are actually paying a lower rate than they did back then – down from 28% to 24%. However, there can be no guarantees that the government doesn’t consider this approach. The fact the tax has changed so much over the years means more changes can never be entirely ruled out.
“But while equalisation of CGT rates with income tax may look on paper as if it would raise more revenue for the public finances, it could change the way people interact with their investments. If the government is weighing up the possibility, it needs to consider all the possible flaws in the approach.
- It could put people off investment
“Such a massive hike would almost double the rate for higher and additional rate taxpayers overnight, which makes investing outside ISAs and pensions far less attractive. The government is keen to encourage more people in the UK to invest, so steps that make it less attractive seem counterintuitive.
“Equalising CGT rates with income tax also fails to recognise that investing is higher risk, and that lower rates of CGT as well as the tax-free allowance reflect that risk for investors looking to crystallise gains. By introducing meaty hikes for higher and additional rate taxpayers, the government would end up reducing the appeal for people to realise significant gains.
- It might not raise significant extra revenue
“Capital gains tax hikes don’t necessarily raise any more money, because so many people will change their behaviour and hoard assets for life to avoid the tax. It’s one tax rise that can actually cut the tax take.
- It could drive poor investment choices
“Investors choosing to hoard assets until their income drops or even until death could lead them to hang onto investments that don’t suit their needs, potentially resulting in poor financial outcomes.
“Beyond that, if the government goes down this path, it would need to consider whether to introduce some form of indexation allowance to prevent any inflationary gains from facing additional tax. However, this would create further complexity in the tax system.
Five ways to save capital gains tax
“There’s no need to panic and it’s important not to take steps you would come to regret when the dust settles after the Budget if there are no changes to the tax. However, it’s worth considering five sensible ways to ensure you don’t pay more capital gains tax than you need to:
- Use a Stocks and Shares ISA. Stocks and Shares ISAs protect investments from both capital gains tax and dividend tax. This makes a difference not only when you withdraw money, but when you buy and sell to rebalance your portfolio as you go along. If you have investments outside an ISA and the available allowance, you can move them inside using the Bed and ISA process.
- Consider pensions. If you’re happy to tie the investments up until the age of 55 (rising to 57 in 2028) growth is tax-free – plus you get income tax relief on contributions into the bargain.
- Think about the timing. You can often choose when to realise a gain, so you can take advantage of your annual allowance of £3,000 each year.
- Use your losses. If you have made allowable losses, include them on your tax return, because they’ll be offset against gains in the same tax year. Once the losses have reduced your gain to the annual allowance, if you have any losses left over, you can carry them forward to a future tax year.
- Plan as a couple. Married people and civil partners can transfer assets without triggering a capital gains tax bill – although when they eventually sell, the gain is calculated from when it was first bought rather from when they received the gift. They can then realise £3,000 of tax-free gains each year and make the most of their ISA allowance – to protect the investments from CGT in future too.
How capital gains tax works
“Capital gains tax may be paid on profits made when you sell assets or transfer them to anyone who isn’t a spouse or civil partner. If all your gains minus all your losses for the year fall within the £3,000 annual allowance, there’s no tax to pay.
“Above this, higher and additional rate taxpayers pay 24% on gains. If you’re a basic rate taxpayer with combined income and gains up to £50,270 then you’ll pay 18% on gains. But on any gains over and above this threshold, you’ll pay 24%.
A brief history of capital gains tax
- 1965 – capital gains tax was introduced
- 1980 – a single rate of 30% was introduced
- 1982 – indexation was introduced so you were only taxed on gains over inflation, although it only applied to growth after 1982
- 1988 – the system was reformed so gains were rebased to their value in 1982 (removing gains before that date from the charge) and tax rates were aligned to your marginal rate of income tax
- 1998 – future indexation was frozen and taper relief introduced, so your rate of tax on gains fell the longer you owned the asset
- 2008 – taper relief and prior indexation was dropped in favour of a lower capital gains tax rate of 18%
- 2010 – a higher rate of 28% was introduced for higher and additional tax rate payers
- 2016 – rate on stocks and shares was cut to 10% for basic rate taxpayers and 20% for higher rate taxpayers, while the rate on property remained the same
- 2020 – after rising from an initial £1,000, the annual exempt amount hit £12,300
- 2023 – in April the annual exempt amount was cut from £12,300 to £6,000
- April 2024 – the rate on property was cut to 24% and the annual exempt amount was cut to £3,000
- October 2024 – the rate on stocks and shares was increased at the Budget to match the one on property, at 18% for basic rate taxpayers and 24% for higher rate taxpayers
