John Healey rules out Budget CGT rise – but planning is still essential

• Chancellor John Healey has reportedly ruled out raising the rate of capital gains tax (CGT) at the Budget
• Previous reports indicated Healey wouldn’t equalise CGT with income tax, but did not rule out a rate increase altogether
• This doesn’t necessarily mean CGT will remain completely untouched
• Even if we get no changes to this tax at the Budget, there are some sensible steps investors can take

Sarah Coles, head of personal finance at AJ Bell, comments:

“John Healey has reportedly ruled out raising the rate of capital gains tax (CGT) in the Budget. Investors will be pleased to see the end of those potentially damaging Budget rumours, at least for now. It will hopefully stop people taking steps they might come to regret later and crystalising gains they might otherwise have been able to make gradually and avoid tax on entirely.

“Not raising the rate is probably a sensible move from a tax revenue perspective. The August tax receipt figures were a useful reminder that for this particular tax, tightening the screw doesn’t always raise more money for the public finances.

“In the months since the start of the new tax year, the Treasury has taken less in CGT than a year earlier. That suggests the dramatic cuts in the annual exempt amount and the hikes in the rate for stocks and shares haven’t boosted the tax take as the Treasury might have hoped. People simply changed their behaviour to get around it – realising gains before a change and then hoarding assets for as long as possible afterwards, or simply deferring gains in the hope of waiting out higher taxes.

“However, it’s worth bearing in mind that there’s more than one way to crack a nut. There is no evidence at all that Healey is considering any other tweaks to CGT, but the fact that options still exist mean it’s still worth considering CGT and making plans to avoid paying more than your fair share of it.

Other possible tweaks – and the problems with them

“Technically, Healey could change the CGT annual allowance again, even cutting it altogether. Fortunately, this is fraught with so many difficulties it might not be something the chancellor wants to rush into. It would be miserable news for investors and counterintuitive for a government that wants to boost retail investing in the UK.

“It would run the risk of putting people off investing at all outside ISAs and SIPPs. It’s not just the prospect of the tax, but all the extra admin they would need to do any time they sell an investment. Rebalancing their portfolio could become a huge and expensive headache.

“For those who already invest in this way, there’s a risk that in an effort to avoid the cost and hassle, they might not make key changes and hang onto investments that aren’t right for them. Some could hoard assets for life, waiting for the gain to reset on death.

“Another change that has been suggested before, including by the now defunct Office of Tax Simplification, is to make CGT payable on death. Again, this isn’t an easy or straightforward change, so the chancellor is unlikely to be in a rush to embrace it if he has other options.

“It would mean that rather than gains resetting on death, estates could face a horrible tax bill. Those who hoarded assets to get around the current tax rules could face enormous bills at the worst possible time. And those who were planning to do so would need a complete rethink.

“It would also raise serious questions of how CGT and inheritance tax interact. Imposing double taxation on the death of an investor would be met with serious opposition. Any additional rules to prevent this would be likely make the process of dealing with an estate even more horribly complicated. Given that the IHT changes to pensions are already set to create huge administrative headaches for grieving families, would Healey really want to make this even worse?

What could you do?

“Reports that the CGT rate won’t rise in the forthcoming Budget don’t make planning for this tax any less essential than before. It’s worth taking five steps to protect yourself.

1. 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.
2. 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.
3. 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.
4. 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.”

Sarah Coles
Head of Personal Finance

Sarah Coles is head of personal finance. She’s passionate about helping people get to grips with their money, so they have more freedom to do the things that really matter to them in life. She regularly provides insight and analysis for the press, writes columns and articles and appears on TV and radio. She covers everything from savings and investments to pensions and tax. Sarah is an award winning former financial journalist, spending almost 20 years working for publications from Bloomberg to Moneywise and AOL Money. She has worked as a financial spokesperson for the past nine years, and most recently won Headline Money’s Expert of the Year award.