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Rachel Reeves could try fill the public finances gap by raising capital gains tax (CGT) to match income tax levels.
Sarah Coles, head of personal finance at Hargreaves Lansdown, said:
As Rachel Reeves peers into the hole in the public finances and is set to reveal just how deep it goes, rumours are swirling as to whether CGT changes could be used to generate extra cash to help fill it.
One of the suggestions doing the rounds is that capital gains tax rates could rise to match income tax. It was one of the things the Office for Tax Simplification explored in 2020.
The 2022/2023 financial year was a record year for CGT returns, adding £16.9bn to public finances. (Final annual details will be reported on Thursday, including breakdowns of types of gains).
But Hargreaves, which is an investment platform for everyday savers, is – perhaps unsurprisingly – against a rise in CGT. Coles said:
It’s a common myth that ‘no-one pays capital gains tax’. It is true that most of this tax is paid by a relatively small number of people, but the rapid increase in the amount of CGT paid, the cuts to the annual tax-free allowance, and the numbers paying this tax show it’s something all investors need to consider.
They note that the number of people paying CGT rose by 50% to 394,000 over 5 years to 2021/2022, and that the annual tax-free allowance was cut from £12,300 in 2022/23 to £3,000 in the current tax year.
Coles claims that this could run the risk of seeing investors “hoarding their profits until they die”.
She says this could including people who invest in buy-to-let properties, who might hold onto their homes instead of selling them off to new owners or landlords.
Coles says:
This would see a shocking hike for UK investors.
The tax system should be encouraging and rewarding long-term investing. This has been absent from the CGT system since taper relief was abolished in April 2008.
Right now, investors face the double-whammy of a system that taxes investments that are simply keeping pace with inflation and allows for far lower gains to be realised tax-free each year.
If the rates do end up rising, it would add insult to injury. We’d urge the Chancellor to reintroduce incentives that reward long-term investing.
Rachel Reeves prepares to issue an update on the state of the country’s public finances and what the Labour party has inherited from the former Tory government.
Reeves is expected to tell MPs that the Tories left a £20bn hole in government spending for essential public services.
And a think tank has now said that the £20bn shortfall is equivalent to the Tories’ pre-election national insurance cuts.
Paul Johnson, director of the Institute for Fiscal Studies, told BBC Breakfast:
It is very striking that if this problem is about £20 billion big, that is exactly the scale of the national insurance cuts implemented by Jeremy Hunt just before the election.
Now, if those cuts were implemented in the knowledge that there was this kind of hole, that is not good policy, to put it mildly.
The Tory government announced 2p would be cut from National Insurance in last year’s autumn statement, and announced a further 2p cut in this year’s spring budget.
The combined cuts were expected to save the average earner £900 a year.
However, the former government was said to have been been looking at further public spending cuts, had the Tories won last month’s election, as one way to pay for the tax reduction. That was despite economists’ warnings that such a move would cause public services to buckle.
Stay tuned as we look ahead to Reeve’s address, which is expected to lay the groundwork for tax rises, cuts to public spending, and delays to some major infrastructure projects.
The agenda
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9:30am BST: UK mortgage approvals, net mortgage lending and consumer credit for June
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3:30pm BST: UK Chancellor Rachel Reeves to set out state of UK public finances
Source: theguardian.com
