Chancellor Rachel Reeves is widely expected to announce changes to Capital Gains Tax (CGT) in the Autumn Budget, with reports suggesting that the Government will target the sale of shares rather than second homes and buy-to-lets.
Currently, the CGT rate for sales of shares stands at 20% and there have been suggestions that Reeves could raise this to as high as 39%, although Prime Minister Sir Keir Starmer said such speculation was “wide of the mark.”
Rachael Griffin, tax and financial planning expert at Quilter, said a comprehensive reform of CGT may have been deemed too complex and time-consuming for the Chancellor to tackle immediately.
She explained: “Raising rates could be seen as a temporary measure aimed at boosting government revenues in the short term. However, the effectiveness of this approach is debatable. The key question is whether higher CGT rates will actually generate more tax revenue or simply alter investor behaviour.
“Without a delay before implementation, higher CGT rates might encourage individuals to hold onto their assets longer, rather than triggering an immediate surge in tax revenue. Additionally, it could lead to increased use of tax-efficient products such as ISAs and investment bonds.”
Sarah Coles, head of personal finance at Hargreaves Lansdown, warned that changes to CGT would not only affect the very wealthy but ordinary investors with assets outside a stocks and shares ISA.
“Hiking the headline capital gains tax rate could put people off investment altogether and erect another barrier to entry for new investors. It might also stop people from selling current assets because they’re worried about the tax. This could force them to make decisions that ultimately leave them worse off,” said Coles.
According to Coles, suggestions that the rate could rise to match that on property would also risk damaging confidence in investing. She argues there should be a difference between the treatment of capital gains derived from growing companies to that of a fixed asset such as a house or land in order to boost business growth in the UK.
“The tax environment should be built to encourage retail savers to invest for the long term, supporting investment in growing businesses and boosting long term resilience. Capital gains tax already creates issues here, because it can effectively be a tax on inflation. If you hold investments for the long term, even if all you do is keep pace with inflation, you’ll be taxed on anything over your allowance when you sell up,” Coles added.
Advisers said the ongoing speculation surrounding possible changes to CGT, as well as potential pension and inheritance tax changes, is also creating a challenging environment for both advice firms and clients.
Jamie Jenkins, director of policy at Royal London, said: “At this stage, most advisers are fully expecting changes that will affect their clients and the advice they provide to them but the speculation is shifting on a daily basis, leaving advisers in a difficult position.
“Meantime, it’s clear that clients are getting anxious about possible changes that may affect their finances and some are bringing forward elements of their retirement plans.”
A survey by Royal London found that over a third (36%) of advisers have been proactively contacting clients about the Budget, while 80% of advisers have seen an increase in the number of clients contacting them about taking action in relation to their pension. Of those, 94% of clients who had not taken any tax-free cash asked about taking it all ahead of the Budget, while 40% of advisers have clients who had planned to take tax-free cash in stages and move the rest to drawdown or UFPLS but now want to take the full amount.
