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12th November 2020 - Tracey Payne

Capital Gains Tax – are changes coming? Investors beware!

An article on last night’s news about a review of Capital Gains Tax made me sit up and listen, then question whether I had actually heard correctly. On reflection, perhaps I shouldn’t have been so surprised; after all the Government has been propping up the economy and British businesses with billions of pounds to help us through the Covid-19 pandemic. According to the BBC it has already borrowed £208.5bn so far this year. It is therefore, hardly surprising that we are starting to hear rumblings of how some of the enormous debt will start to be recouped.

The issue in question is a suggestion by The Office for Tax Simplification that the Chancellor should consider doubling the rates of Capital Gains Tax (CGT).

This tax was introduced in the UK in 1965, when it was levied at a flat rate of 30%. The structure and rates of the tax have since undergone several major reforms and it looks like another one might be on the cards. 

Existing Capital Gains Tax rates

For everything other than investment in property, the rates are currently as follows:

A doubling of these taxes would certainly hurt investments and provide added impetus to make use of ISA allowances and pension contributions, where profits can be sheltered from CGT tax altogether.

Proposed Increases

An even more eye watering outcome could be felt by property investors, where current rates of Capital Gains Tax already amount to the higher rates of 18% for standard rate taxpayers and 28% for higher and additional rate taxpayers. A doubling of these figures would result in potentially whopping tax bills being levied on the profits of higher and additional rate tax payers in excess of the annual allowance, potentially wiping out over half of an investors gain.

At Herbert Scott we are often asked to advise clients who see property investment as an attractive option.  It’s hardly surprising given the historic obsession with buy-to-let property, based on a simple narrative that provided the owner is covering his or her mortgage costs, all will be well, as house prices will surely always rise. There is no doubt that many established buy-to-let landlords have made considerable money, but the past does not always set a precedent for the future. 

Without due care and attention to the rapidly falling profitability of buy-to-let property – not least due to tax reforms already introduced in recent years– newcomers and those with high loan-to-value mortgages risk getting their fingers burnt.  

Today’s recommendation to double the rates of Capital Gains Tax would certainly provide yet another blow to property investors. I suspect we might also see many landlords looking to explore alternative investment solutions where tax can be managed more efficiently.

We would welcome the opportunity to have a discussion with you about this matter.  Please call us on 01273 407500 to speak with one of our advisers, or contact us by clicking here.

Further details about the announcement can be found here.

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