Chancellor Rachel Reeves has announced plans to hike capital gains tax rates in what will be a “bitter blow” to investors, experts warn.
In her inaugural Budget speech to the House of Commons, the Chancellor said capital gains tax (CGT) will rise from 10% to 18% for basic rate taxpayers and from 20% to 24% for higher rate taxpayers, to match the rates on residential property.
It forms part of Reeves’ plan to raise taxes by £40 billion as the Government seeks to plug the £22 billion black hole in the nation’s finances and generate capital for growth in servcies.
Sarah Coles, head of personal finance at Hargreaves Lansdown, called the change is “a blow for investors”. She said: “This doesn’t just affect those who are hit with a far bigger bill, it also makes investment less attractive for newcomers who don’t want to have to get to grips with a new tax risk.
“Already far fewer people in the UK invest than elsewhere in the world and this could compound the problem. For existing investors, there’s a danger this will drive investor behaviour and people will focus on tax considerations rather than the investments that make the most sense for their circumstances.”
The changes follow the slashing of the tax-free allowance over the past couple of years from £12,300 a year in 2022/23 to just £3,000 in the current tax year.
At the same time, investors have had to contend with frozen income tax thresholds pushing more people into higher rate tax and automatically pushing up their capital gains tax rate.
Coles said: “Talking about things like capital gains tax as wealth taxes obscures the fact that many people on average incomes, who have invested carefully throughout their lives, can face a tax bill when they rebalance their portfolio or sell up to cover their costs later in life. The annual allowance of £3,000 doesn’t stretch particularly far when you’re selling an investment you’ve held for 30 years or more so investors should consider how to protect themselves.”
Investment experts stressed that the government’s commitment to driving growth and investment in the economy is at odds with its decision to raise taxes.
“The tax environment should be built to encourage investment for the long term, supporting investment in growing businesses and returns for investors to boost long-term resilience. It’s disappointing the government has decided to hike this tax without considering it with changes to taxes on investors more broadly,” said Coles.
Tony Hicks, head of sales at Copia, said the announcement will have “notable implications” for advisers with clients who are holding assets within managed portfolio services outside of tax wrappers, not least in respect of the ‘foreseeable harm’ rules under Consumer Duty.
Hicks said: “The rise in CGT will particularly impact high net worth individuals and investors, making it more likely these investors will exceed their allowance and pay tax on their investment gains each year. The Consumer Duty mandates that firms actively work to prevent such an adverse outcome for clients that could have been foreseen and acted on.”
Utmost International points out that the latest OBR forecast points to Capital Gains Tax generating almost £18 billion extra in revenue over the next 5 years, compared to previous estimates.
Brendan Harper, Head of HNW Technical Services at the firm said: “Individuals should take this opportunity to reconsider their investment strategies and explore alternative vehicles such as insurance products, rather than holding assets directly as these will fall into the Capital Gains Tax net. The increase in the Capital Gains Tax rate, combined with the reduction of the annual exemption to £3,000 from £12,300, makes falling into the CGT net more likely when switching between investments.”
James Carter, Head of Platform Product Policy, Fidelity International, added that one of the continuing challenges was “how to evolve a cash savings culture into confidence to invest for longer-term needs” and encouraged the Government “to work together with the industry to ensure they do not create further barriers to investing or long-term financial planning”.
A positive move he said, would be to further simplify the ISA regime, which could be achieved by combining Stocks and Shares and Cash ISA products, as well as improving the ease of transfers.
