While the Institute for Public Policy Research has said millionaire entrepreneurs wouldn’t be put off investing by a rise in CGT, this may not apply to other types of investors.
In particular, ordinary investors with assets outside a stocks and shares ISA could see their tax rate double if the Chancellor goes ahead with this tax hike, according to Hargreaves Lansdown.
Its survey of 2,000 people last month found that the predicted hike is a “serious concern” for higher-rate taxpayers in particular.
Tax rate could double
Sarah Coles, head of personal finance at Hargreaves Lansdown, said: “It’s all very well saying that millionaire entrepreneurs could take a capital gains tax hike on the chin, but these are far from the only people who would be hit hard by this tax rise.
“Ordinary investors with assets outside a stocks and shares ISA could see their tax rate double, which risks flooring them with a horrible tax bill, or forcing them to change their behaviour – which could cause a whole host of other issues.
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“Hiking the headline capital gains tax rate could put people off investment altogether – and erect another barrier to entry for new investors.
“It might also stop people from selling current assets, because they’re worried about the tax. This could force them to make decisions that ultimately leave them worse off.”
Autumn Statement
Research by Hargreaves Lansdown finds that among higher-rate taxpayers, changes to CGT are the fourth-most pressing Autumn Statement worry – after income tax, pension taxes and inheritance tax.
It found 7% are worried about the impact it could have on them.
Suggestions that the rate on stocks and shares could rise to match the rate on property would also risk damaging confidence in investing, Hargreaves Lansdown said.
It is calling on the Government to establish a clear difference between the treatment of capital gains derived from growing companies to that of a fixed asset, such as a house or land.
Without that difference, business growth can’t be boosted, the company said.
Coles said: “There is scope to widen this distinction within the CGT system – not narrow it.”
Encouraging long-term investing
Coles went on to say that 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.
“Capital gains tax already creates issues here, because it can effectively be a tax on inflation,” she said.
Coles continued: “If you hold investments for the long term, even if all you do is keep pace with inflation, you’ll be taxed on anything over your allowance when you sell up.
“To make matters worse, the slashing of the annual allowance, so it’s now smaller than any time since 1982, means ever-larger slices of the gain have been pushed into the realms of tax.
“If the rate of CGT increased, without any other changes, it would make the problem even worse.”
Stamp duty
CGT isn’t the only tax headache people face when they hold stocks and shares outside tax wrappers like individual savings accounts (ISAs) and Self-Invested Personal Pensions (SIPPs).
Stamp duty is levied on buying shares at 0.5%, one of the highest rates in the G7.
Profits made by a company invested in are subject to corporation tax.
UK stocks are often popular for income, but the dividend tax allowance was slashed to £500 by the last Government.
Coles said: “If the Government is determined to make changes to capital gains tax, then this can’t be considered alone.
“It also needs to look into restoring allowances for capital gains as well as dividends, along with consideration of the stamp duty rate.
“Boosting the position of investors here could offset the need to resort to the complexity of systems [that] recognise the impact of inflation on capital gains, or previous systems of taper relief related to how long assets have been held.”
