Most UK investors confused over capital gains tax and experts warn it is set to rise

News - Tax

Written by Ray Clancy

Wednesday, 27 January 2010 09:22

Bewilderment over capital gains tax means that UK investors are losing thousands of pounds with over 90% admitting they don’t understand what it is or believe it is not relevant, it is claimed.

Just 9% of Britons claim to fully understand CGT according to research from Fidelity International. Even some of the tiny number who said they understood CGT were deluded because only 6% was able to name the correct £10,100 limit for the current CGT tax-free allowance, leaving a worrying 94% of the nation confused.

Fidelity International is urging the nation to take a closer look at this important tax break and wants investors to realise that they could be losing hundreds or even thousands of pounds a year.

‘It is clear from our research that CGT is a widely misunderstood and ignored tax. For those who pay income tax at 40% or higher the rate of capital gains tax at 18% may look attractive but the key for most people is wherever possible to use their tax free allowance,’ explained Paul Kennedy, Head of Tax and Trust Planning at Fidelity International.

He said the two issues are often confused. ‘The rate of tax applies only where a gain exceeds the annual allowance. The annual allowance provides tax-free return whatever the rate of CGT and currently that’s up to £10,100 of tax-free gains per person per year which is £20,200 for a married couple,’ he added.

He points out that because the annual CGT allowance does not accumulate you cannot just sit back over the years and use all your previous allowances in one go. To use their annual tax-free allowance investors must realise a gain in that tax-year. There are various strategies for doing this.

‘Investments that are subject to CGT can often carry higher risk so use them only if they are suitable for you,’ added Kennedy.

Meanwhile some experts are predicting that CGT rises inevitable with a rise to a flat rate of 25% possible. If the burden of the public deficit is to fall on those with the broadest shoulders, as Chancellor Alistair Darling has said, a top rate of CGT of just 18% for those paying income tax at 40% or 50% seems unsustainable, according to Danny Cox, Head of Advice at Hargreaves Lansdown.

‘The gap between income tax rates and the capital gains rate is a huge open goal; unfortunately a rise in CGT seems inevitable,’ he commented. Between now and the end of the tax year, there is a short time to take advantage of the rules as they stand, he added.