Treat capital gains tax as more friend than foe

ed extra revenue. A false argument, say most economists who have ever analysed the matter.

A study by the Adam Smith Institute in June 2010, concluded that “increases in capital gains taxes above a very modest level result in decreases in revenue”.

For example, in 1988 CGT rates were hiked by ten points from 30 per cent to 40 per cent. Revenues fell dramatically, more than halving from £2,175 million in 87-88 to £976 million in 90-91 and further still to £606 million in 92-93. That was a 70 per cent drop in revenues in five years.

Even more damning, CGT is frequently described as ‘economically a bad tax’, discouraging entrepreneurship, savings and investments and distorting capital markets. Except that generations of politicians, mainly on the Left, have had a habit of failing to take on board these lessons.

Their tendency is to see the matter ideologically, viewing CGT as a cash cow with which to beat the rich and produce monies needed for the creation of a fairer society. An easy target especially as asset values have increased over the last 10-plus years and many people are sitting on large uncrystallised gains.

Hence, over time, CGT rates have tended to fluctuate, often widely.

Even in the modern era there has been constant change – 2007/8, aligned with income tax rates; 2008-10, a flat 18 per cent ; 2010-16, 18 per cent basic and 28 per cent higher, and from 6/4/2016, 10 per cent and 20 per cent.

For those less familiar with CGT, it is a tax on the increase in value of your possessions.

Typical investments that you might have to pay capital gains on include a second property, shares, the sale of a business and valuables such as jewellery, antiques and art.

You don’t have to pay CGT if you sell a car, or if you make a profit on selling your own home.

Neither do you pay it on any gains you make from ISAs, UK government gilts and Premium Bonds, betting, lottery or pools winnings.

One advantage is that everyone has an annual tax free allowance – currently in this tax year it’s £11,300 for individuals and £5,650 for trusts.

It is a “use it or lose it” opportunity that has to be accessed in the tax year. It cannot be carried forward.

If assets are split between partners and used each year, this could effectively double the amount you can make before CGT is due.

Another attractive allowance is entrepreneurs’ relief which limits CGT on the sale of shares in a qualifying business to ten per cent on the first £10 million.

In addition, there are certain investments that can be made to defer the tax to a future date, such as Enterprise Investment Schemes, but beware the possibility of worsening the position by them crystallising when rates could be higher.

Best to try and treat CGT as your friend rather than your enemy. Trevor Law is managing director of Eastcote Wealth Management, chartered financial planners,

based in Solihull. Email: tlaw@eastcotewealth.co.uk

The views expressed in this article should not be construed as financial advice