CGT is normally charged at a simple flat rate of 20 percent (Image: Getty)
Wealthy Brits are rushing to sell second homes and other assets including shares and family businesses ahead of fears of a Budget raid which could push up Capital Gains Tax to 39 percent.
Finance experts say speculation around suggestions the Chancellor Rachel Reeves will push up tax on un-earned income to bring it closer to income tax rates has seen some panic selling of assets.
CGT is normally charged at a simple flat rate of 20 percent, which is payable on the profits made on assets such as shares. If taxpayers only pay basic rate tax and the gain keeps them within basic rate, they may only be subject to a reduced rate of 10 per cent.
There are higher rates of CGT on the gains made through the sale of residential property, apart from the main family home. The figure is 24 percent for higher rate taxpayers and 18 percent for basic rate taxpayers.
There is also a CGT charge of 28 percent linked to investment funds.
These CGT rates are currently significantly below the income tax rates for high earners, which are either 40 or 45 percent, and the 20 percent for most workers who pay the basic rate.
Leaks from the Treasury this week suggest Rachel Reeves could raise CGT significantly as the government looks to raise billions in extra taxes to help fill a claimed £22 billion black hole in government finances and raise cash to protect public services, such as the NHS, schools and social care, from cuts.
CGT was paid by 369,000 people in the 2022-23 tax year, according to official figures, who had made £80.6bn worth of gains between them. The levy raised £14.4bn last year, 15 percent lower than in the previous tax year, mainly due to lower property prices.
Internal documents in the modelling note stress that it is hard to predict how people will respond to higher taxes on capital gains. They say at the lowest end of a possible increase – a move from 28-33 percent – a few hundred million pounds could be raised.
Increasing the tax to the middle of the range across different classes of assets could raise about £1bn.
However, the documents warn that at the highest 39 percent rate, the annual amount raised by CGT could actually fall after five years as people find ways around the tax.
Historically, CGT has always been below income tax, although Margaret Thatcher’s Chancellor, Nigel Lawson, infamously equalised the levels with income tax as far back as 1988.
Alice Haine, Personal Finance Analyst at Bestinvest by Evelyn Partners, the online investment service, said: “Worries over a potential Capital Gains tax raid has knocked investor confidence prompting many to sell assets such as second homes or shares to realise gains at a cheaper rate than if the Chancellor pushes ahead with a rumoured plan to raise CGT as high as 39 percent.
“Some investors are treating October 30 like the end of the tax year, with investors pouring money into tax wrappers, such as Individual Savings Accounts (ISAs) and pensions to protect assets from tax.
“With the constantly shifting speculation creating anxiety for people on what the best strategy is for their finances, the concern is that some may make rash life-changing moves that might prove to be unnecessary or ill-advised.”
Quilter tax and financial planning expert Rachael Griffin says: “Reports that Chancellor Rachael Reeves is considering hiking capital gains tax rates to between 33 percent and 39 percent are not all that surprising given an alignment to income tax rates had previously been tabled, but questions remain whether such a drastic hike would achieve much in the way of filling the Chancellor’s ‘black hole’.
“A full-scale reform of capital gains tax has perhaps been deemed too lengthy a process for the Chancellor to take on, so hiking rates may be viewed as a stop gap in the hopes of boosting coffers in the nearer term.”
She added: “However, the real question will be whether it will raise more tax – which is only likely to be in the hundreds of millions at best – or whether it would simply make people change their behaviours.
“Unless there is a delay before implementation, increasing capital gains tax rates would likely only incentivise people to hold assets for the long term rather than result in a quick and immediate increase in revenue.”
Wealthy Britons are rushing to sell second homes and other assets (Image: Getty)
The FT reported today that executives have stepped up sales of their shares in UK-listed companies to avoid being hit with a higher rate of CGT on their profits.
Directors of listed companies have sold shares at an average rate of £31m a week since the General Election, which is more than double the £14m pace of the previous six months.
The total value of disposals since the general election has reached about £440m, according to the figures compiled by investment platform AJ Bell.
Some business owners are also speeding up plans to offload their companies altogether to avoid the potential CGT rise, according to a survey by wealth manager Evelyn Partners.
One executive told the FT: “My sale was purely down to concerns about the CGT changes. The chancellor’s approach of leaving the whole economy in limbo over potential changes is not at all helpful.”
Another executive at a company quoted on London’s Aim who also made disposals last month said they were worried changes in CGT could deter future investors. “People will be more reluctant to risk their capital,” they said.
The survey by Evelyn Partners found that nearly a third of the 500 business owners who had fast-tracked their exit plans over the past year had done so because of concerns about a possible rise in CGT.
Chris Etherington, partner at accounting firm RSM UK, said: “People are running out of time to make these decisions ahead of the Budget and the risk is that they panic. Everyone has October 29 as a hard deadline.”
