Capital gain tax reform: what could it mean for investors?

Capital Gains Tax paid on profits from securities could be hiked to pay for the government debt accumulated during the coronavirus pandemic.

The value of investments can fall as well as rise, and you may get back less than you invested. Past performance is no guarantee of future results
Capital gain tax reform: what could it mean for investors?

Capital gains tax (CGT) could be increased to pay for the billions borrowed to support the economy amid the pandemic. The Office of Tax Simplification (OTS) issued a report commissioned by Chancellor Rishi Sunak which said bringing CGT rates in line with income tax and cutting exemptions could raise an extra £14 billion for the Treasury.

What is capital gains tax?

Capital gains tax is charged when an asset rises in value and is sold at a higher price than what the individuals paid for it. For example, when selling a stock of a company that has risen in price, an investor will pay CGT on the profit, if the stock is held outside of a stocks & shares ISA or a SIPP account.

The report says that the tax is ‘counter intuitive’ and ‘creates opportunities for tax avoidance’. It states that the rate disparity between CGT and income tax ‘can distort business and family decision-making’. The findings also suggest decreasing the CGT tax-free allowance from £12,300 to between £2,000 and £4,000.

What would the tax reform mean for investors?

Currently, basic taxpayers pay a 10% CGT rate, while higher and additional taxpayers are charged at 20%. The rates rise to 18% and 28% respectively when realised on the sale of an additional home.

The income tax rates, however, are twice as high. This means CGT rates could double if they are aligned with the income tax as suggested by the OTS. For investors, the tax reform would imply higher tax-bills for gains on securities held outside tax-free ISA and SIPP wrappers.

The tax-reform proposals have led to criticism as it could harm the UK’s tax competitiveness globally. Robert Coville, director of the centre-right Centre for Policy Studies said in an interview with Sky News: ‘Aligning the CGT and income tax rates, as suggested by the OTS, would seriously impact the UK’s overall global tax competitiveness and leave us with the highest top rate on capital gains for shares in the OECD.’

Form has failed to submit. Please contact IG directly.

  • I’d like to receive information from IG Group companies about trading ideas and their products and services via email.

Get my guide

For more info on how we might use your data, see our privacy notice and access policy and privacy webpage.

●  Discover the benefits of investing your money

●  Learn about the different investment options available and how to get started

●  Understand how to build a diversified portfolio and manage your risk

Get your free beginner's guide to investing

Get your free beginner's guide to investing

●  Discover the benefits of investing your money

●  Learn about the different investment options available and how to get started

●  Understand how to build a diversified portfolio and manage your risk

Form has failed to submit. Please contact IG directly.

  • I’d like to receive information from IG Group companies about trading ideas and their products and services via email.

Get my guide

For more info on how we might use your data, see our privacy notice and access policy and privacy webpage.

Publication date : 2020-11-18T16:20:55+0000

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

Open an account now