Capital Gains Tax Hikes May be Coming Soon

I always thought that the Conservatives were generally the party that lowers taxes, so hints that capital gains tax (CGT) rises may be coming soon, seems at odds with previous Conservative administrations.

Hang on, though. This is not a Conservative government. This is a coalition government with the Lib Dems, and the Conservatives have pledged to raise the income tax threshold to £10,000, which is one of the mainstays of the Lib Dem manifesto.

Taking the poorest out of the taxation system is an admirable idea, but raising the tax thresholds to do so is expensive, just at a time when the budget deficit looms large and the Conservatives have pledged to reduce the massive borrowing as soon as possible.

So the familiar story of reducing taxes here, but increasing taxes there, will be prevalent as the new government grapples with debt reduction strategies.

Capital gains tax looks like being in the cross hairs of the Con/Dem government and pundits are starting to predict that CGT rates will be brought into parity with existing income tax rates in the emergency budget to be held within 50 days of the election, that the Conservatives have promised.

CGT is currently set at 18% and does represent a great opportunity to reduce tax burdens. Harmonisation of income tax and capital gains tax rates could see the current flat 18% rate of CGT be replaced by levels of up to 50%, depending on an individual’s income tax band.

Investors and those with large unrealised capital gains will probably want to start planning now in order to maximise tax efficiencies, a point raised by Jason Hollands, Director, Head of Corporate Affairs at F&C Investments, who said:

“Closing the differential rates between CGT and income tax should prompt a flurry of investors, particularly those on higher income tax rates, to urgently consider crystallising gains made on long-standing holdings ahead of the Budget.

“One strategy open to them will be to ‘bed and ISA’ these holdings, i.e. to sell them and repurchase within an Individual Savings Account so that they utilise current annual CGT exemptions and incur any additional tax liability at the 18% rate while future returns will be ring-fenced from the taxman altogether. We expect IFAs and tax advisers will have a very busy month ahead.”

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