The Liberal Democrats have unveiled plans to overhaul capital gains tax to raise £5 billion for the NHS.
In a newly-released manifesto, the Lib Dems have pledged to reform CGT to “close loopholes exploited by the super wealthy.” According to the latest HMRC statistics, 14,000 multi-millionaires used the loophole to pay less than half the top rate of income tax on their combined £60 billion income.
The party has vowed to make the whole system “much fairer” through cutting tax or keeping them the same for the vast majority of people, while ensuring that the super wealthy pay their “fair share.” Lib Dem leader Sir Ed Davey said the move would help it to implement an NHS rescue package, including increasing the number of GPs by 8,000, improve mental health services, repair the NHS dental service and invest in cancer research and treatment.
Under the proposed changes, there would be three rates of CGT, like there are for income tax: 20% for gains up to £50,000, 40% for gains between £50,000 and £100,000 and 50% for gains over £100,000. Unlike the current system, where the CGT rate is determined by adding together an individual’s income and capital gains, the new system would be based solely on gains.
In addition, the capital gains tax-free allowance would rise to £5,000 and a new “inflation allowance” would be introduced so that any gains that are purely the result of inflation are not taxed at all.
Charlene Young, pensions and savings expert at AJ Bell, said the move to target CGT was not a surprise, but warned it would be an unwelcome change for many investors and property owners.
The CGT allowance has been slashed by over 75% in two years from £12,300 to its current level of £3,000. HMRC figures estimate 260,000 more individuals and trusts will be paying CGT for the first time by 2024/25 because of cuts to the allowance.
According to Young, private investors could support higher CGT rates if tax-free allowances were restored.
She said: “Whilst a proposed increase in the tax-free allowance and an inflation-adjusted index would be welcome, the combined allowances would need to be closer to the previous high of £12,300 to gain support from private investors. The Lib Dem manifesto proposes increasing the allowance to just £5,000.”
A survey by AJ Bell revealed that 68% of investors would support an increase in the GCT rate if it means a return of the £12,300 allowance. Only 13% favoured the Chancellor’s approach of cutting the CGT allowance to £3,000.
To tackle CGT, AJ Bell advises investors to make the most of tax-free wrappers, with gains on investments held in ISAs and pensions like SIPPs sheltered from CGT altogether.
The investment platform also says investors should make the most of the option to transfer investments to their spouse or civil partner and use a pension contribution to reduce taxable income.
