As Andy Burnham appears poised to become the next Labour leader and potentially the UK's Prime Minister later this month, speculation is mounting over his prospective economic policies. Among the most significant rumours is a potential overhaul of Capital Gains Tax (CGT), a move that could have far-reaching implications for UK households and businesses with investments.
Reports suggest that if Wes Streeting were to be appointed Chancellor, he might explore aligning CGT rates with income tax rates. This would see the current basic rate of 18% and the higher/additional rate of 24% rise to 20%, 40%, and 45% respectively. This proposal, reportedly discussed by Mr Burnham in a May interview, aims to generate additional revenue for the Treasury. Proponents, including the Centre for the Analysis of Taxation and tax think tank Tax Policy Associates, argue that such equalisation could reduce tax avoidance and stimulate economic growth.
However, the potential impact on investors and the broader economy is a subject of considerable debate. Former Conservative Chancellor Jeremy Hunt has warned that increasing CGT above 24% could lead to a reduction in overall revenue, as investors might alter their behaviour to avoid higher taxes. Conversely, Dan Neidle of Tax Policy Associates suggested that the extra funds generated could be used to cut the basic rate of income tax, a move he believes would be beneficial for the economy and widely supported.
Calculations by wealth manager Rathbones illustrate the potential financial implications for individuals. For an additional-rate taxpayer, aligning CGT with income tax could see the tax bill on a £50,000 gain increase by nearly £10,000. Higher-rate taxpayers could face an increase of over £7,500 on a similar gain, while even basic-rate taxpayers might see their bill on a £10,000 gain rise by more than £100. These figures are based on gains made outside tax-efficient wrappers and include the current annual exempt amount of £3,000.
For UK savers and investors, understanding these potential changes is crucial. Strategies such as fully utilising the annual ISA allowance of £20,000, which shelters gains from CGT, become even more important. Techniques like 'Bed and ISA' transfers and interspousal transfers between married couples or civil partners can also be employed to manage tax liabilities effectively. Regularly using the annual CGT allowance of £3,000 by selling assets to realise smaller gains tax-free can also help mitigate larger future bills.