Advisers to hit the drawing board if govt overhauls CGT

Writes Stephen Little

Advisers to hit the drawing board if govt overhauls CGT

Financial advisers have warned they will have to have a rethink if proposals from the government’s capital gains tax (CGT) review come to fruition.

A new report from the Office for Tax Simplification (OTS) says that CGT intake could be doubled to £14bn if it is brought in line with income tax.

Minesh Patel, financial planner and director at EA Financial Solutions, says the proposal to change to CGT is “highly concerning and will affect planning”.

“The reason most people invest in products that utilise CGT rather than income tax is for lower rates of taxation, so we are going to have to review those now based on the proposal going forward,” he says.

“Advisers will have to decide whether to try and to take advantage of the current regime rather than the possible future one.”

Neil MacGillivray, head of technical support at James Hay, says advisers will have to look at the implications of a CGT tax change and weigh up the risks of selling assets.

“Advisers do not normally start tax planning until the New Year but they are going to have to make their clients aware of the proposed changes and what sort of impact they will have,” he warns.

“For example, if a client has a big commercial property portfolio to sell and they are in a position where they are considering liquidating that soon, then there is an argument that they should maybe consider taking a tax hit of 20% as opposed to 45%.

“As an adviser you have got consider whether it is worth the risk paying the tax now or under a potentially higher tax liability in April.”

Government spending during the pandemic has pushed the UK’s national debt to more than £2trn and it could take decades to pay it off. If the proposals go ahead the rise would most likely hit wealthy people who have second homes and buy-to-let properties, as well as individuals with investments outside of tax wrappers.

For basic rate taxpayers earning less than £50,000, CGT is currently levied at 18% on second homes and 10% for other assets. Higher tax payers whose income is more than £50,000 currently pay 28% on residential property and 20% on other assets.

‘Wait for confirmation’

Verve Investment Planning IFA Steve Buttercase believes the current low rate of CGT is “anachronistic” and that the proposals represent a long overdue attempt to level up.

“CGT needs to be radically overhauled and this is a good start,” he says. “Less than 1% of the population pay CGT, so it is hardly a smash and grab tax raid or an attack on the middle class. The only time they pay CGT is with the sale of an asset.”

Peter Chadborn, director at Plan Money, warns advisers to wait for confirmation of the changes before advising clients.

“If it goes ahead it means that certain aspects of planning will have to be revisited for clients whose strategy is underpinned by CGT,” he notes.

“As advisers we almost have to tune ourselves out from what is happening as you can be on quite dangerous ground if you are advising in a speculative way.”

He adds that the financial commitments for the government as a result of Covid-19 means that taxation has to rise and that CGT seems an obvious choice.

“There are going to be winners and losers whenever changes like this are implemented,” he continues.

“Raising CGT for wealthier people will make it seem fairer to the public rather than raising income tax which affects everybody. However, this assumes that if you have got a second home you are wealthier than the average person, which is not necessarily the case.”