30 October 2024
If you are covering the budget and the changes to Capital Gains Tax, please see the following comment from Rachael Griffin, tax and financial planning expert at Quilter:
"The government’s decision to immediately raise the taxable rates of Capital Gains Tax to 18% for the basic rate and 24% for the higher rate will have significant repercussions for a wide range of investors, primarily those holding shares. That said, CGT is paid by only 350,000 people per year equating to 0.65% of the adult population. Therefore, this will not be a change that is felt throughout the nation. But while this move is aimed at boosting revenue, is likely to have the opposite effect, as it discourages investment and leads to reduced economic activity across key sectors.
"One key problem with raising CGT is that it doesn’t necessarily guarantee more tax revenue. In statistics produced by the government which model the revenue impact of certain policies this is laid bare. For example, in the analysis it found that a 10 percentage point increase in the higher Capital Gains Tax rate shows a significant negative impact, reducing revenue by £400 million in 2025-26, £985 million in 2026-27, and £2.25 billion in 2027-28. This is because higher CGT rates often result in fewer people selling their assets, as they choose to sit on them to avoid triggering the tax. This has the effect of locking wealth into certain asset classes, reducing the flow of capital into the economy. This behavioural shift could undermine the government’s revenue-raising objectives, as fewer transactions mean less CGT collected overall.
"However, opting to increase CGT rates but not so much as to align them with income tax rates is perhaps an attempt by the government to at least partially alleviate the issue of people sitting tight.
"The changes today will impact on traditional financial planning techniques. Over the past few years, changes to the CGT landscape such as the significant reduction in the Annual Exempt Amount coupled with cuts to the dividend allowance have drained the life out of General Investment Accounts and made ISAs, due to their tax efficiency, even more important for all. Similarly, for those looking for simplicity in their tax reporting, onshore bonds have once again become a more useful 'tax wrapper'. In addition, higher rate and additional rate taxpayers may use an onshore bond to help shield income yields and investment gains from higher personal rates of tax on an arising basis."
