Financial experts believe there is more CGT rises ahead as tax places extra burden on UK investors

News - Tax

Written by Ray Clancy

Monday, 12 July 2010 09:16

The recent rise in the top rate of Capital Gains Tax in last month’s UK emergency Budget was much less than expected but some financial experts believe there is more to come.

There was much relief when CGT was increased from 18% to 28% rather than the 40% to 50% that had been anticipated for top rate taxpayers but a recent poll indicates that financial advisors are not convinced there will not be a further rise.

The survey from technology solutions provider 1st Exchange reveals many advisers are moving their clients away from assets attracting CGT in anticipation of further rises.

In a poll of 187 advisers, the fear of further increases in top rate CGT has seen 29% advise their clients to take precautionary measures to move into more tax efficient vehicles.

The majority polled were relieved that CGT was not pushed up to 40%. However, an almost equal split of advisers said they were advising clients to stay invested to avoid triggering CGT at the new higher rate (36%) or take advantage of market gains in spite of the increase (35%).

Interestingly, only 8% of advisers thought the hike to 28% in top rate CGT would have a major impact on the UK market and long term investing.

The poll also canvassed advisers’ views on the decision to scrap compulsory annuitisation. The majority, some 64%, were disappointed with the Government’s decision to launch a consultation ahead of implementing the decision, judging this as another set back in the long awaited change to give individuals more flexibility over their pensions savings.

‘The expectation from many advisers is that the Government’s planned austerity measures could include a further hike in the top rate of CGT, which will exacerbate the rising tax burden on consumers,’ said Paul Yates, propositions and business development director for 1st Exchange.

Others have warned that the CGT changes will leave many ordinary investors paying hefty tax bills on inflationary gains. Longer term investors could lose out significantly, according to Fidelity, the fund management group. But without any indexation or taper relief being applied, many will be paying tax on inflation.

For example, if an investor bought a house worth £100,000 in 1985, and sold it 25 years later to fund their retirement the property would now be worth £490,617, according to the Nationwide House Price index.

At the basic CGT rate of 18% of gains over £10,100 this would translate into a tax bill of £68,493. However, with the size of this gain, even those who earned no income in that year would be pushed into the higher rate bracket, and would pay tax at 28% on this gain, a bill of £106,545.

An inflation- inked allowance would reduce this tax bill in line with the basic rate but the Chancellor ruled out any such allowance, arguing it would further complicate the CGT regime. ‘Of this amount the higher rate taxpayer is paying almost £40,000 based on the increase attributable to inflation, rather than on real inflation adjusted capital gains,’ said Fidelity.

In the case of shares, a basic rate taxpayer who invested £10,000 in the FTSE All Share in 1988 would currently face a tax bill of £9,910, based on the current value of the FTSE All Share index. However, higher rate investors will now face a bill of £15,415. Almost £3,000 of this tax bill is for increases attributable to inflation.