How a capital gains tax raid could cost you £24,300
Thousands would be hit with bigger tax bills on investment profits if Rishi Sunak overhauled capital gains taxes to help pay for the Covid crisis.
He is said to be mulling changes to the duty, which is levied on investments held outside of Isas, second homes and other valuable assets such as jewellery, as he attempts to plug the £400bn Budget deficit.
A recent report from the Government’s own tax adviser, which the Chancellor commissioned himself, recommended upping the historically low rates of CGT so they were more in line with income tax and slashing the £12,300 annual allowance, among other proposals.
But what would the radical change mean for you?
Today CGT raises less than £10bn. The main rates are currently 20pc on most assets and 28pc for residential property that is not the main home.
Upping rates in line with income taxes would raise £14bn a year for the Treasury, the Office of Tax Simplification calculated.
It would mean a higher-rate taxpayers paying double the amount they do today in many cases, or even more if combined with a reduction in the tax-free allowance.
Someone making a gain of £20,000 in the stock market today would pay £1,540 in CGT. But they would pay £3,080 if the rate went up to 40pc. They would pay £6,400 if a rate rise were combined with a reduction in the tax-free allowance to £4,000, as the first chart shows.
Someone making a gain of £100,000 would pay £24,300 more than they would today, under the same scenario.
A £100,000 gain from an investment property would be hit with a £38,400 bill – almost £14,000 than they would pay under the current system.
The OTS did not recommend how far to reduce the exempt amount.
Cutting the annual allowance to £5,000 would double the number of people forced to pay the toll by 2021-22. Three times as many would pay if the bar was set even lower at £1,000, assuming no change in taxpayer behaviour, as the third chart shows.
A £6,000 threshold would raise close to £500m in just one year and hit close to a quarter of a million people. At £2,500 it would raise an added £850m, catching 360,000 more people, according to Government estimates.
Taxpayers would fork out a further £1.6bn every year if CGT bills were effectively passed down the generations, another of the OTS’ recommendations.
Tax bills for families inheriting shares or second properties would be based on the value they were acquired by the person who has died. Today, the tax slate is wiped clean on death and the “CGT clock” restarts for the new owner.
