Capital Gains Tax
Expected by investors and largely priced into the stock market, the recent UK election outcome ushering in a new Labour government is unsurprising. Whilst the result has buoyed markets, the incoming government has little headroom to enact fiscal change. Investors are therefore asking themselves what the economic policy will be and how it will affect them.
So, what will taxation look like under the new Labour government?
In the run up to the election there were some “gaps” in each party’s manifesto, one such area being plans for Capital Gains Tax (CGT). The Labour government have pledged not to raise income tax, national insurance or VAT but have been less explicit around CGT, which impacts many of our clients’ investment planning decisions.
Speculation has been rife as to whether the CGT allowance, which has been cut from £12,300 a mere two years ago to £3,000 today (Trusts subject to CGT can halve those allowances again), will be removed completely or whether rates could be aligned to income tax rates.
The old adage, “We don’t know what we don’t know” springs to mind.
Presently, we don’t know what the Government’s plans are for CGT other than they have pledged not to call a Budget immediately. We therefore continue to work with what we do know and that is that Capital Gains Tax is 10% for a Basic Rate Taxpayer and 20% for a Higher Rate Taxpayer. Every individual has an allowance of £3,000 to create gains before incurring a tax liability. Let’s face it, no one likes paying taxes, but at current rates these are favourable compared to other tax rates such as Income Tax (up to 45% in England and up to 48% in Scotland) and Inheritance Tax (up to 40% on assets above the Nil Rate Band).
We manage investments without creating undue tax liabilities, unless previously advised to the contrary. Previous CGT allowances have made this manageable in many cases. However, the reduction in the CGT allowance can limit the ability to effectively manage a portfolio of investments without creating a tax liability.
The author Richard Carlson is widely quoted as say that “At tax time, it helps to remember that if your tax obligation has increased from the previous year, it’s usually because you’re enjoying more income. That’s a situation to which most of us aspire. Higher taxes are a price we pay for great success”.
Although referring to income tax, we can relate this to CGT. A CGT liability means your investments have grown, which is of course the aim of investing.
However, it is important to correctly establish the objective for your investments. We see that this broadly separates our clients into two groups: either ensuring that their investments are managed in line with their preferred risk tolerances to provide the best opportunity of achieving their goals and objectives; . or conversely growing their assets without any strategy or concern for risk or volatility but not paying any tax. We are acutely aware that each client’s circumstances are different, and we take satisfaction in aligning the management of investments to every individual’s unique requirements.
Efficient management of your investments involves more than simply looking at CGT allowances and whether or not to pay tax. We will continue to work with you to help you achieve your goals. Part of that may be working with your other professional advisors to create a long-term financial plan.
At this early stage of a new government, there will be many twists and turns to come, with amendments to taxation policies likely. What that will look like we do not know. What we do know is that taxes are here to stay, CGT being one of them, and that we are here to work with you to determine how prominently it features in your investment journey. So don’t hold it against us when we bring up potentially paying tax, it may be just worth considering a further discussion.
The views expressed are those of Thorntons Investments. The contents of the article are solely for information purposes. This information has been prepared using all reasonable care. It is not guaranteed as to its accuracy, and it is published solely for information purposes. Our opinions are subject to change without notice and we are not under any obligation to update or keep this information current. It is not to be construed as a solicitation or offer to buy or sell securities and does not in any way constitute investment advice. The value of investments can fall as well as rise and you may not get back the amount you have invested. The income from an investment may fluctuate in money terms. Any information concerning the tax treatment of an investment is based on our understanding of current HMRC rules which may be subject to future change. Tax advice is not regulated by the Financial Conduct Authority.