The wealth raid gamble that isn't paying off

Times

3 days ago

A Treasury plan to bolster the public purse through higher taxes seems to have backfired.
New figures show that the amount of capital gains tax (CGT) paid has plummeted from £14.6 billion in 2022-23 to £12.1 billion the year after. This is despite rule changes that were designed to raise more tax.
The number of taxpayers caught in the CGT net did however edge up from 376,000 to 378,000, according to HM Revenue & Customs data.
Lizzie Murray from the London tax firm Saffery said: 'The figures present a slight paradox: while increasing numbers have been forced to pay tax, the actual amount paid to the government has dropped significantly compared with previous years.
'So although the rule changes brought more people into the scope of CGT, taxpayers appear to be actively managing their affairs to reduce their tax bills under the new regime.'
CGT is a tax paid on the sale of most assets, including second homes. You used to be able to make up to £12,300 of profit tax-free each year, but the allowance was cut to £6,000 in April 2023 and halved again to £3,000 in April 2024 — a reduction by the former Conservative government that is not yet reflected in the latest CGT figures.
The new Labour government put CGT rates up in October — basic-rate taxpayers now pay a flat rate of 18 per cent on all profits above the allowance, up from 10 per cent on all assets except property, while higher-rate taxpayers pay 24 per cent, up from 20 per cent on assets except property. These changes will also not be reflected in the latest data.
Capital gains are added to your income, so you will be classed as a higher-rate taxpayer for CGT if your taxable gains (your profit minus the CGT allowance) plus your taxable income (your income minus the £12,570 personal allowance) come to more than £37,700 a year.
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Shaun Moore from the financial advice firm Quilter said the policy changes had prompted 'behavioural shifts' that had dented the Treasury's tax take.
CGT is a fairly easy tax to avoid or postpone. This is because it is often within your control to decide when to sell the asset that will trigger a tax bill.
'If the tax will be higher than they would prefer to pay, many can easily avoid it by just not selling the asset in the first place,' said Joseph Adunse from the accountancy firm Moore Kingston Smith. 'It's something very much in their control, which is different to things like income tax where if the rate increases, you still have the same salary so you just pay more tax.'
Adunse said he had many clients looking to mitigate their CGT bill. The idea that policy changes affect taxpayer behaviour is illustrated by the Laffer Curve, an economic theory which suggests that there is an optimal tax rate to maximise Treasury coffers.
The general idea is that very high and very low tax rates will lead to reduced receipts. Too low and the tax system will not bring in enough money, but too high and taxpayers will find ways to avoid paying or leave the country altogether.
Shifting taxpayer behaviour is more of a risk with CGT than other forms of taxes, according to Chris Etherington from the tax firm RSM UK. He said: 'A large proportion of CGT revenues derive from a small number of taxpayers, so you only have to change a few people's behaviour to lower receipts. In fact, about 2,000 people account for 37 per cent of the capital gains that are subject to tax.'
Other factors could have played a part in the drop in CGT receipts.
Julian Jessop, formerly of the Institute of Economic Affairs, a free market think tank, said that many had sold assets sooner than they otherwise might have done because they were worried that a Labour government would ramp up wealth taxes.
'There is plenty of anecdotal evidence that Labour's tax policies are pushing the limits of the Laffer Curve,' he said. 'This is also consistent with economic theory and past experience — most countries that adopted wealth taxes have since abandoned them.'
The Office for Budget Responsibility now expects CGT receipts to reach £25.5 billion by 2029-30, although this is £5.5 billion less than it had originally forecast in October. A big increase is expected in 2025-26, when those who sold assets in the lead up to October's budget will need to pay their tax bill.
Etherington said: 'The government will be hoping to receive this anticipated windfall. The question then is whether this can be sustained, or whether domestic and geopolitical affairs will put the brakes on CGT receipts in the future.'
You do not have to pay CGT on the sale of your main home, your car, investments held in an Isa or a pension, Premium Bond gains or lottery winnings, but you should expect a tax bill on the profit you make from selling most other assets.
You will also pay CGT when you give something away, trade it for another asset or get compensation based on an item's value, such as if something is stolen or destroyed in an accident.
But there are simple ways to set up your finances to lower these bills. Use all your Isa and pension allowances because any gains made from investments held within these 'wrappers' are free from CGT.
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If you are married or in a civil partnership, look at your tax allowances and tax rates as a combined entity. Adunse said: 'If one of the couple isn't earning income, they would have a lower tax rate, so making investments with a potential CGT liability in their name can mean that you pay a lower rate.'
Another option is to offset your gains against your losses. This is called crystallisation and you can do it with losses made up to four years ago. Gifts to charity are also free from CGT, so if you usually give a hefty sum of cash, consider giving the charity the asset that you would have paid CGT on instead.
'Many people may not realise that they are now likely to pay CGT and it's essential to know about the reduced allowances,' said Claire Trott from the financial advice firm St James's Place. 'What may have once been a straightforward sale, could now result in a tax bill.'
The Treasury said: 'These figures cover the previous government. The annual exemption ensures people are not taxed on low levels of capital gain, and the current levels remain at an appropriate level to fulfil this while helping to fund essential public services.'