Rumours are already swirling about what changes Andy Burnham could make if he were to win the Labour leadership contest – including a shake-up of the capital gains tax regime.
The MP for Makerfield looks more-than-likely to gain the keys to Number 10 later this month and is said to be considering Wes Streeting as his chancellor.
Should Streeting take on the role, he could look at reforming capital gains tax (CGT) in attempts to drum up much-needed cash for the Treasury.
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In an interview with the BBC’s Nick Robinson in May, the former health secretary suggested raising the three CGT rates to mirror income tax rates – 20%, 40% and 45%.
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Currently, you pay a rate of 18% if you’re a basic-rate taxpayer and 24% if you are a higher or additional-rate taxpayer.
A number of experts have called for the equalisation of CGT rates with income tax rates, including the Centre for the Analysis of Taxation and Dan Neidle, founder of tax think tank Tax Policy Associates, arguing it would reduce tax avoidance and boost UK economic growth.
Neidle posted on X that Streeting’s proposal was “good”, suggesting the extra money it brought in could be used to cut the basic rate of income tax.
“That would be a brave thing for a Labour politician to do, but in my opinion the right thing at this moment. Spend the rest on e.g. defence. I think most people would agree,” Neidle said.
However, Jeremy Hunt, former chancellor for the Conservative Party, said a CGT rate rise would be “terrible” for the economy.
He said: “It doesn't matter if you're left or right, don't do it. If you increase your CGT above 24%, you will get less revenue, not more, because investors will change their behaviour.”
MoneyWeek asked Andy Burnham’s office for comment.
How would a rise in capital gains tax rates affect you?
Calculations by wealth manager Rathbones suggest aligning CGT rates with income tax rates could increase the tax bill on a £50,000 gain by almost £10,000 for an additional-rate taxpayer.
A higher-rate taxpayer’s bill would rise by over £7,500, according to Rathbones. The tax bill on a £10,000 gain would be more than £1,000 higher.
Basic-rate taxpayers would be stung less – Rathbone’s calculations suggest the tax bill on a £10,000 gain would be over £100 more compared to the current rates.
These figures were calculated based on gains being made outside tax wrappers such as ISAs and pensions and including the £3,000 CGT annual exempt amount.
How to protect against capital gains tax
Everyone gets a CGT annual allowance of £3,000. Any gains made within each tax year less than this amount aren’t taxed, and there are other methods you can use to lower your CGT bill too.
Maximise the use of ISAs
Gains made inside tax wrappers like ISAs are free from CGT so it’s worth utilising your full ISA allowance each year. The current annual ISA allowance is £20,000 per tax year.
Assets like shares or funds held outside an ISA can be transferred into a tax-wrapped ISA through a ‘Bed and ISA’.
Jason Hollands, managing director at wealth manager Evelyn Partners, said: “This involves selling investments, ideally not exceeding the annual £3,000 CGT exemption, and then repurchasing them within an ISA so that future gains – and income – are sheltered from tax.”
Use interspousal transfers
Assets can typically be transferred between married couples and civil partners without triggering a tax bill.
Transfers can be a useful way of moving your assets around and using up each person’s CGT and ISA allowances to full effect.
It can also be worth transferring assets to a partner who pays a lower rate of CGT, thereby reducing your combined tax bill.
Use your annual allowance rather than letting gains build
By selling assets each year within your annual £3,000 allowance, you can pull out profits tax-free and save yourself a larger bill on a big chunk of gains down the line.
Holland said: “The annual CGT exemption has become much smaller at £3,000 than it used to be, but it is still valuable. Many investors overlook it, allowing unrealised gains to build up over many years.”
