It was inevitable that sooner rather than later Chancellor of the Exchequer Rishi Sunak would put the nation on red alert that taxes will have to rise to pay for the £190billion of support the Government has given the economy to steer it through lockdown and beyond.
The alert came just a few weeks ago, a week after delivering his mini-Budget aimed at staving off a massive jump in unemployment and encouraging people to go out and spend money on the high street and in pubs and restaurants.
First, he set the cat among the pigeons by commissioning a review into capital gains tax. Although nothing may come of the work, designed to ‘ensure the system is fit for purpose’, it is surely no coincidence the review will be completed before Sunak delivers his Autumn Budget – thereby enabling him to follow through with any changes.
While refusing to be drawn on whether he intended to break promises made in last year’s Conservative General Election manifesto – namely, no raising of rates in income tax, national insurance or VAT – it seems unlikely that he will incur the wrath of Tory supporters by going down this route. His mention of the need for a ‘sensible conversation’ on taxation suggests other taxes will be targeted instead – which leads us back to capital gains tax.
A possible way forward would be for Sunak to tax capital gains at the same rate as that applied to dividend income. Currently, any annual dividend income from share holdings (admittedly a rarity these days as listed companies have pulled in their reins) above £2,000 is taxed at 7.5%, 32.5 per cent or 38.1% – dependent on whether an investor is a basic, higher or additional rate taxpayer. These rates sit between current capital gains tax rates and income tax rates.
Capital gains tax on the sale of a main home would surely be a step too far. Although some experts believe higher tax rates on capital gains would raise much-needed tax revenue and represent a least worst option impacting primarily on wealthy investors, not everyone agrees. Professor Philip Booth, senior academic fellow at the Institute of Economic Affairs, says it is a ‘complicated and damaging tax’ that should be abolished.
Capital gains made within tax-friendly savings vehicles, such as ISAs and pensions, are free from capital gains tax. Also, all withdrawals from ISAs are tax-free. So it makes sense for investors to utilise these capital gains tax-free zones as much as possible. One often overlooked tidying up exercise is to ‘bed and ISA*’ – selling shares or investment funds held outside an ISA and then repurchasing them within the plan. This means the holdings are then immune from capital gains tax. Investors should also consider crystallising gains between now and Sunak’s Budget in November, taking advantage of their £12,300 tax-free capital gains allowance. The proceeds could then be used to fund an ISA or pension. Those who are married or in a civil partnership could transfer assets to the partner who is paying a lower rate of income tax.
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*Due to the way that ‘bed and ISA’ deals are actioned, the re-purchase is often not placed on the same working day. This means you could be out of the market for a short period.
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