Capital Gains Tax: The Quiet Money-Drainer

The Telegraph today has a stinging criticism of the current government’s policy on CGT. Here’s a summary – In recent times, a silent tax storm has been brewing on Britain’s financial horizon, which stands to affect not just the wealthy, but any middle class family with even modest assets.

The Changing Tax Landscape

It’s clear: the government is always on the hunt for revenue streams. In many ways, Brits have seen an increase in the amount of tax they pay – from income taxes to council taxes. But the latest aggressive tweak to our tax system might have slipped under many radars. The sharp knife of taxation has targeted property investors and landlords with the massive reduction in capital gains allowance.

The Big Blow to Capital Gains Allowance

Capital gains allowance, for those unfamiliar with it, is a threshold below which you don’t pay capital gains tax when you sell an asset that’s grown in value. This year, Chancellor Jeremy Hunt took a bold step, slashing the capital gains allowance from £12,300 to £6,000. Alarmingly, it’s set to plummet further to just £3,000 by next April.

This move isn’t just a tax rise in disguise; it arrives at a precarious moment. The property market is at an all-time high, and many landlords, compelled by government policies, are looking to sell. So, at face value, this seems to be a straight-forward method to extract thousands from property sellers.

Capital Gains vs Inheritance Tax

The capital gains tax’s silent dominance over inheritance tax is intriguing. Let’s take a step back: two decades ago, inheritance tax was the government’s golden goose, raking in £2.5bn from death duties compared to capital gains’ modest £2.3bn. But, last year’s figures were startlingly different. Inheritance tax, still considerable, brought in £7bn. Meanwhile, capital gains skyrocketed, accumulating more than £18bn.

With these revisions, the number of people coughing up for capital gains tax is projected to spiral upwards, with predictions pointing to revenue surpassing £26bn by 2028, according to the Office for Budget Responsibility.

And while capital gains impact properties and certain investments, we mustn’t forget that Mr. Hunt has also targeted dividend allowances. It has been reduced from £2,000 to £1,000 and is set for another decline to £500.

The Implications and Outcomes

While it’s easy to see these changes as merely numbers and percentages, they have real-world impacts. It’s undeniable that the increasing tax burden, spurred on by stagnant thresholds and rising wages, is eroding earnings across the board. But, the assault on capital gains is especially brutal for investors.

This capital gains surge seems even more calculated when considering the government’s push to discourage landlords with augmented regulations and dwindling tax breaks for second homes.

The mounting capital gains tax, paradoxically, makes a case against inheritance tax, which many regard as a harsh penalty at the worst time. Ironically, it’s a tax from which the wealthiest escape, thanks to shrewd financial planning, leaving middle-class families in the lurch.

Furthermore, the safety net of savings is fraying. Even as saving rates improve, the personal savings allowance remains unchanged since its inception seven years ago. This stagnation means higher-rate taxpayers earning interest over £500 could be slapped with a tax bill for money saved outside of an Isa.

There’s chatter about an Isa overhaul, potentially pushing savers towards more investments. Questions arise: is the £20,000 annual savings limit merely benefiting the wealthy?

Looking Ahead

For the average Brit, the current tax refuge seems to be the Isa. But given the government’s unpredictable fiscal maneuvers, who knows for how long? It’s a somber reminder: today’s economic policies demand our vigilance and understanding, lest we be caught unaware in the next tax storm.