The chancellor announced a hike in the capital gains tax rates but industry experts have argued this could backfire if investors resist selling.
In the Budget yesterday (October 30), Rachel Reeves increased higher rate capital gains tax to 24 per cent and lower rate to 18 per cent.
This tax is charged on profits made from a sale of assets such as selling a second home or investments.
However, Rachael Griffin, tax and financial planning expert at Quilter, said the government’s decision to immediately raise the taxable rates of CGT will have significant repercussions for a wide range of investors, primarily those holding shares.
“That said, CGT is paid by only 350,000 people per year equating to 0.65 per cent of the adult population,” she said.
“Therefore, this will not be a change that is felt throughout the nation. But while this move is aimed at boosting revenue, it is likely to have the opposite effect, as it discourages investment and leads to reduced economic activity across key sectors.”
Griffin said one key problem with raising CGT is that it doesn’t necessarily guarantee more tax revenue.
In statistics produced by the government which model the revenue impact of certain policies this is laid bare.
She explained that in the analysis, it found that a 10 percentage point increase in the higher CGT rate shows a significant negative impact, reducing revenue by £400mn in 2025-26, £985mn in 2026-27, and £2.25bn in 2027-28.
“This is because higher CGT rates often result in fewer people selling their assets, as they choose to sit on them to avoid triggering the tax,” she said.
“This has the effect of locking wealth into certain asset classes, reducing the flow of capital into the economy. This behavioural shift could undermine the government’s revenue-raising objectives, as fewer transactions mean less CGT collected overall.”
Likewise, Les Cameron, head of technical at M&G Wealth, said HMRC figures indicated that full alignment would have cost the exchequer, so the rates announced today are presumably at a level where they are expected to generate revenue.
“What remains to be seen is how investors react,” Cameron said.
“If savers now hold on to their assets until rates come down, this measure won’t bring in any revenue.
“However, in practice, investors will probably need to buy and sell to ensure their investments continue to meet their risk profile and we will likely see a sell-off at the lower rates before they rise.”
Other investments
However, in light of the hike, Cameron argued that a less appealing CGT regime should result in an increased use of insurance bonds, and other tax wrappers, which has already been underway over the last couple of years, continue.
“While tax rates shouldn’t be the driver of investment decisions, neither should they dictate disinvestment decisions,” he said.
