Investors could face a “horrible tax bill” and potentially see their tax rate double as the Government considers raising Capital Gains Tax (CGT) rates in the upcoming Budget.
Chancellor Rachel Reeves may increase CGT on share sales, sparking concerns among ordinary investors and stockbrokers, recent reports suggest.
Sarah Coles of Hargreaves Lansdown cautioned that such a move could “put people off investment altogether and erect another barrier to entry for new investors”.
The potential reforms, aimed at closing a £40billion annual funding gap, have raised alarm bells about the impact on retail investors and the broader UK investment landscape. Critics argue that the changes could deter prudent saving and undermine efforts to boost British businesses.
Currently, CGT is levied at 10 per cent for basic rate taxpayers and 20 per cent for higher earners on profits from share sales exceeding £3,000.
The proposed changes could see these rates increase by several percentage points, according to reports in The Times. However, the rate on property sales, such as second homes, is expected to remain unchanged at 24 per cent.
The reforms are part of Labour’s strategy to address the funding gap without raising rates on major revenue sources
Many clients have reportedly sought advice on accelerating their asset disposal plans ahead of any tax hike. While the Government aims to raise revenue in the “low billions” with these changes, critics argue that such increases could stifle entrepreneurial innovation and economic growth.
The reforms are part of Labour’s strategy to address the funding gap without raising rates on major revenue sources like income tax and VAT.
The impact of these potential changes on ordinary investors could be significant. Under the current system, a higher earner with a £20,000 return would pay £3,400 in CGT. However, even a modest five percentage point increase would raise this to £4,250, while a 10 point hike could result in a £5,100 tax bill.
For larger gains, the effect is more pronounced. A higher-rate taxpayer with £50,000 in investment profits currently faces a £9,400 tax charge. This could rise to £11,750 at a 25 per cent rate or £14,100 at 30 per cent.
Coles warned that such increases could deter savers from investing and building financial resilience. She said: “Faced with a horrible tax bill, ordinary savers could well be put off investing their money.”
Financial experts are calling for a more balanced approach to CGT reform. Alastair Black of Abrdn warned that higher rates could make gifting assets unappealing, leading to stockpiling until death.
Both Hargreaves Lansdown and Abrdn experts emphasised the need for additional measures if rates are increased.
Black suggested accounting for inflation when calculating CGT. Coles proposed restoring the tax-free allowance to its 2022 level of £12,300.
Coles said: “The tax environment should be built to encourage retail savers to invest for the long term, supporting investment in growing businesses and boosting long-term resilience.”
Experts argue that reforms discouraging investment could undermine the Government’s promises to boost British businesses and contradict the Financial Conduct Authority’s efforts to encourage more savers to invest.
The potential CGT reforms come as part of a broader £40billion plan to shore up public finances.
This figure exceeds the £22billion fiscal deficit Labour claims to have inherited from the Conservatives.
While Prime Minister Sir Keir Starmer has rejected speculation of CGT rates as high as 39 per cent, neither he nor the Chancellor have ruled out increases.
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The reforms could have far-reaching implications for the UK economy and investment landscape.
The Financial Conduct Authority has expressed concerns about excessive cash holdings, with Barclays analysis suggesting UK adults hold £430billion in “possible investments” as cash savings.
CGT revenue is predicted to hit a record high of £23.5billion in 2028-29 due to rising asset prices, according to the Office for Budget Responsibility.
