Capital gains tax, the next increase?

You are probably fed up with the superlatives about national debt so I won’t add to them. As we head towards the Pre-Budget Report, the speculation and rumour surrounding further tax rises is rife.

Let us look at where the next tax rises may occur. The usual suspects, beer, cigarettes and petrol, are obvious candidates: 1p on a pint of beer raises £120m and 5p on petrol a further £1bn; small pickings compared to debt of £175bn.

However, pushing VAT to 20 per centt raises £12bn, and moving Capital Gains Tax (CGT) from 18 per cent to 40 per cent raises an estimated £3bn according to BDO Stoy Hayward. Certainly these are much more significant.

Higher rate tax relief on pension contributions will almost certainly become a thing of the past and reducing the ceiling from those with income of £150,000 to £100,000 would be a very easy step towards this. In my view anyone with earnings over £100,000 should be seriously considering making their pension contributions sooner rather than later.

In my view CGT becomes the next obvious target:

1. The top rate of CGT is just 18 per cent where as income tax is 40 per cent rising to 50 per cent for high earners from April 2010. This gap seems simply too wide to be ignored.
2. Very few people pay CGT and it is perceived to be a tax on the wealthier Higher taxes for high earners is popular with the majority.
3. Investors, high earners and their advisers are already taking steps to move as much remuneration and investment profits into gains rather than income i.e. shifting income bearing investments to ISA, low yielding to non-ISA shares and funds etc. 
4. With the stock market and property market way off their highs, the immediate impact of a change to CGT would be lower now and therefore probably more palatable than at market highs. It may even stimulate some activity in the buy-to-let housing market.
5. So called “flipping” - moving your principle and private residence from one property to another to save CGT - highlighted by the MP’s expenses scandal, could easily be abolished. This would also be a popular move and an easy way to increase CGT for those with more than one property.

What should investors do?

CGT is normally charged over the course of a full tax year. It is not inconceivable that a change announced in the Pre-Budget report could take immediate affect, but not act retrospectively on gains already realised in this tax year.

However, investors don’t like paying CGT, even at lower levels. Potentially a change to CGT would not have the immediate increase in revenue the Chancellor is looking for – investors would simply retain their holdings.

For these reasons we might assume that any change to CGT could be announced, but not come into force until 6 April, providing a window of opportunity for investors to act. In these circumstances it would make sense for investors to trigger taxable gains at a lower rate now rather than wait for higher tax rates later. This could stimulate activity and immediate tax revenue.

Clearly you need to consider your personal circumstances first before you act. For those critics of ISA for basic rate taxpayers, it strikes me that having a portfolio where you don’t have to worry about CGT, is worth far more than ISAs get credit for.

Danny Cox is head of advice at Hargreaves Lansdown.The comments are his own and do not necessarily reflect those of his company.