Last week, the Treasury announced a review of capital gains tax (CGT). This has led to speculation that the government may announce a tax grab on investors in the autumn budget.
The coronavirus pandemic has pushed government borrowing to a predicted £350bn this year. The government forecast in March was £50bn–£60bn. This extra borrowing will have to be repaid at some point and the Institute of Fiscal Studies says that higher taxes are inevitable.
So how could this review of CGT potentially impact investors and what can you do now to protect yourself?
How does CGT work currently?
CGT is a tax on the profit when you sell an asset that has increased in value. Individuals have a tax-free allowance of £12,300 in the current tax year. However, there are an array of rules, allowances, and loopholes available. I can understand why the government might want to review and simplify CGT.
CGT is currently 10% for basic ratepayers and 20% for higher and additional ratepayers (18% and 28%, if it relates to residential property that is not your primary residence).
How could this affect investors?
Those who pay CGT are twice as likely to pay higher rate income tax. Therefore, a tax increase imposed on people who are perceived to be wealthier could be viewed as more acceptable by the general public at a time when jobs and finances are under pressure.
One potential solution would be for the government to raise the CGT rates closer to the income tax rates. This could raise a significant sum for the government given the current CGT rates are about half the income tax rates, and bring in more than £10bn per year.
Alternatively, the tax-free allowance could be either abolished or scrapped. Labour had already promised to reduce this allowance from £12,300 to £1,000 had it won the last election. Both moves could significantly impact investors.
What I am doing now
The government has maintained the review is ‘standard practice’. But there are several things you can do to minimise any potential future impact as an investor in the stock market.
First, you can take advantage of the tax-free ISA allowance. This is £20,000 per tax year and is currently exempt from both UK income and capital gains tax.
If you are under 40, I would consider opening a Lifetime ISA. You can invest up to £4,000 a year (out of your £20,000 limit) and the government will top-up your contribution by 25%. However, do note that with a Lifetime ISA, your money is locked away until you are 60.
Pensions are also exempt from CGT and your contributions are also tax efficient up to annual limits. Again, this assumes you are comfortable with your money being tied up until retirement. I’ll certainly be looking to maximise all these vehicles before I consider using a share dealing account.