Poorly-performing stock markets have been blamed for a drop in capital gains tax (CGT) receipts but a rise is predicted in the coming years amid the prospect of a tax raid by the Labour government.
The latest data from HMRC shows the taxman took £14.4 billion in CGT receipts during the 2022/2023 tax year.
The figure is down 15%, while the number of people paying the tax dropped by 8% annually to 369,000.
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The tax was paid on £80.6 billion of gains, HMRC said.
However, the amount of capital gains tax paid by investors could be set to soar if chancellor Rachel Reeves raises the rates or changes the allowance or reliefs in her Autumn Budget.
Reeves has refused to rule out an increase to CGT. During a visit to the US, she was asked by Bloomberg on Monday (5 August) whether she was considering increasing capital gains tax. The chancellor replied: "We've got a budget on October 30 and we will set out our policy then, but it's always important when you're deciding tax policy to strike the right balance."
Regardless of whether the widely-expected tax raid on capital gains takes place, CGT receipts are likely to rise anyway, due to the CGT allowance being cut in recent years.
The tax-free allowance was £12,300 during the tax year covering the latest data but has since dropped to £6,000 in 2023/2024 and halved again to £3,000 in April.
“In 2022/23 we paid less capital gains tax, after global stock markets lost around a fifth of their value during 2022,” says Sarah Coles, head of personal finance at Hargreaves Lansdown.
“Yet investors still paid a massive £14.4 billion in CGT and that’s set to rise, because from this point, the annual tax-free allowances faced horrible cuts.”
Who pays capital gains tax?
CGT is charged on the profits from the sale of a business, funds and shares outside an ISA and additional properties.
A higher or additional-rate taxpayer pays CGT of 24% on gains from additional residential property (such as a holiday home or buy-to-let) or 20% on investment gains. For basic-rate taxpayers, the rates are 18% and 10% respectively.
There is a CGT allowance that exempts some of the profits from the tax but this has been cut from £12,300 in 2022/2023 to £3,000 currently.
HMRC says most CGT from 2022/2023 came from a small number of taxpayers who made the largest gain.
In the 2022/2023 tax year, 41% of CGT came from those who made gains of £5 million or more, while 44% came from the 11% of individuals with taxable incomes above £150,000.
London and the South East of England accounted for around half of total gains and CGT liability, HMRC said.
Will capital gains tax rise?
CGT receipts may have dropped in the most recent data release but analysis by the wealth manager Quilter shows the number of people paying the tax has surged by 427% over the past three decades.
It has increased from 90,000 to 369,000 taxpayers since 2004, while tax revenue has skyrocketed from £60 million to £14 billion.
CGT only accounts for around 1.3% of total tax receipts, but with chancellor Rachel Reeves warning that taxes may have to rise to fix the government’s spending inheritance from the Tories, it's likely to be a candidate for reform.
Labour has pledged not to hike income tax, National Insurance or VAT but Reeves has failed to rule out changes to CGT.
In the Bloomberg interview, Reeves refused to rule out raising CGT. She added: “Of course you need to bring in the revenue to fund vital public services, but we've also got to grow the economy. I won't do anything that makes it harder to achieve that economic growth and prosperity."
Reeves also refused to rule out changing the debt rule that constrains tax and spend decisions, saying: “We’ll publish the precise details of the fiscal rules in the Budget,” she said. Changing the definition of debt could make a considerable difference to the degree of so-called "headroom" available this autumn, as measured against those fiscal rules.
Analysts suggest the chancellor could use her Budget to bring the CGT rate in line with income tax or to reduce the tax-free threshold further.
Coles warns that this would be a “massive hike.”
For a basic or higher-rate taxpayer investing in stocks and shares, it would mean doubling the rate. For an additional-rate taxpayer, it’s up 125%, she says.
Shaun Moore, tax and financial planning expert at Quilter, suggests equalising CGT and income tax could lead to significant short- and long-term repercussions.
“Without anti-forestalling measures, there could be a rush to sell second properties, temporarily boosting housing market activity and prompting investors to reconsider their portfolios,” he says.
“At this point, no changes have been announced. Therefore, making decisions based on potential future legislation is not advisable unless selling a second home or buy-to-let property is already part of your plan. These figures, however, highlight the potential for increased tax burdens in the future.”
Adrian Lowery, financial analyst at wealth management firm Evelyn Partners, adds that increasing the CGT rate could deter investment.
“In the case of a private business, a higher CGT rate might deter a sale altogether as the entrepreneur or family owner decides to keep hold and retain the income they are earning rather than sell up and pay a big tax bill,” he says.
“That goes to show the potential economic inefficiency of higher CGT as investors hold on to less profitable assets rather than sell up and reinvest somewhere else.”
He suggests there are other ways the government could up the CGT take.
“One would be to look at levying CGT on assets at death, where currently there’s no liability,” adds Lowery.
“Another would be to reduce ISA allowances or bring in some kind of ‘lifetime’ ISA limit.”
Imposing CGT on death, on top of inheritance tax, could lead to a "double death tax" of more than 50%.
How to reduce your capital gains tax bill
You can only really plan for CGT based on current tax rules but Coles suggests taking more gains while you know where you stand.
“However, it’s vital not to rush into any decisions, or allow the tax to force you into decisions you wouldn’t otherwise take,” she says.
You can also offset losses for previous years.
Laura Suter, director of personal finance for AJ Bell, suggests making the best use of tax allowances and wrappers such as ISAs and pensions.
“While investors should avoid panicking and locking in gains at current tax rates purely based on speculation, they should consider whether there is merit in moving their assets into a tax-efficient environment,” she says.
“If they have investments with capital gains outside an ISA or pension they can sell sufficient assets to reach the current CGT allowance of £3,000 and then re-buy them in an ISA – through a process known as a Bed and ISA. It means that they won’t pay tax on future gains and they are using up this year’s CGT allowance. You just need to make sure you have some of your £20,000 ISA allowance remaining.“
You could also move some assets to your partner.
“If they are not making use of their capital gains allowance, you could move assets to them to benefit from their tax-free limits,” adds Suter.
“If they haven’t used their ISA allowance this year, you could transfer assets to them to then put into their ISA – known as a Bed and Spouse and ISA.”
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