In today’s Autumn Statement Chancellor Jeremy Hunt announced substantial cuts to the Capital Gains tax-free allowance.
There is currently a Capital Gains tax (CGT) annual allowance of £12,300, on which an individual pays no tax.
This tax-free allowance will be halved to £6,000 for the 2023/4 tax year, with a further cut to £3,000 in the 2024/5 tax year.
CGT is payable on capital gains over £12,300 at 10% or 20%. There is also an additional 8% CGT charge if the gain is from residential property.
Capital gains tax brought in £14.3bn in the 2020-21 tax year from 323,000 people.
Les Cameron, head of technical at M&G Wealth, said the change to the tax-free allowance will mean more business owners and property investors will pay the tax.
He said: “The Office for Tax Simplification’s Capital Gains Tax (CGT) review that was published two years ago suggested a halving of the allowance would see the amount of taxpayers double. So, this reduction in the annual exempt amount will see more ordinary investors drawn into the CGT net.
“Some will simply amend withdrawals to remain within the new allowance, others will be drawn into the CGT net and of course there will be the increased tax on those already in the net namely, business owners and property investors.”
Rob Morgan, chief investment analyst at wealth manager Charles Stanley, said the reduction in the CGT allowance would increase the appeal of tax-free wrappers.
He said: “This reinforces the case for utilising ISAs and pensions as far as possible as gains within these are not taxable. Married couples and those in civil partnerships can also transfer assets to each other to make use of two CGT allowances or shift a potential gain to a partner who is in a lower tax band.”
The top 100 taxpayers in the UK pay £3.83bn a year in income and capital gains tax, according to data from HMRC received via a Freedom of Information request by investment service Wealth Club.
The top 100,000 taxpayers paid over £45.53bn last year.
Alex Davies, CEO and founder of Wealth Club, said the Chancellor needs to be careful when considering rises to Capital Gains tax.
He said: “It is commonly accepted that those with the broadest shoulders should bear the greatest burden. But what many people do not realise is: they already do – and have been doing so for years.
“Even if only a handful of the top 100 paid less in tax – or stopped paying altogether – it could be disastrous for the country’s finances.
“And that’s not a remote possibility. The wealthy have more options available to them. The drastic one is leaving the country, the other is to concentrate even more on arranging one’s affairs as to pay as little tax as possible.”
Rachael Griffin, tax and Financial Planning expert at Quilter, said the changes to CGT will cause second homeowners pain.
She said: “The annual tax-free allowance for capital gains will be cut from £12,300 to £6,000 next year and fall to £3,000 from April 2024. This will spell bad news for anyone looking to sell shares, other assets or second homes.
“Take for example a second homeowner who bought their property five years ago for the average house price in 2017 of £227,000. They would have made a gain of £67,559 at today’s average house price of £294,559 and therefore next year when the allowance is cut to £6,000 would pay £17,236 in CGT and if they sold the year after would pay £18,076 when the allowance is £3,000 assuming they are higher rate taxpayers.”
Over eight in ten (81%) of adults back tax increases to help improve the UK’s public finances, according to a survey by Opinium on behalf of investment platform AJ Bell. However, just 35% said they would back an increase in Capital Gains Tax.
Laura Suter, head of personal finance at AJ Bell, said it was no surprise that while Britons would back tax increases, most only support rises to taxes that they will not be paying directly.
She said: “There’s no doubt that the new Chancellor is between a rock and a hard place this week in his bid to balance the books but not alienate the UK public so much that there’s a backlash at the next general election. Only seven weeks ago the British public were being promised a huge round of tax cuts, from National Insurance to income tax to dividend tax. But now Jeremy Hunt must convince them that tax rises are the order of the day.
“While the overwhelming majority of people acknowledge that taxes must rise, to help plug the gap in the UK’s finances, it’s understandable that most people support taxes that they won’t directly pay.”
A recent survey from wealth manager Charles Stanley found that 59% of high-net-worth individuals with over £500,000 in investible assets believe they are already paying enough tax.
