Investors often ignore capital gains tax, but should

With the Chancellor considering raising taxes to provide parachute funding for Social Care this year, it is likely he may increase capital gains taxes in tomorrow’s Budget.  The Conservative Government has guaranteed that they will not raise income tax, VAT and national insurance until 2020 and these measures are enshrined in law.  This leaves few areas where reasonably significant sums can be raised.

Capital gains tax was reduced from 6 April 2016 from 28% to 20% (14% to 10% for basic rate taxpayers) for many investments, excluding property and private equity carried interest.  Following the changes introduced by George Osborne last year, it is not inconceivable that the new Chancellor will seek to either bring these into line with one higher blended rate or build on the trend and target particular sectors with increased rates.

This is set against a background of significant increases in most stock markets over the last year, which leaves many investors sitting on uncrystallised gains on their investment portfolios. Traditionally, gains in portfolios are managed over a long period of time using personal allowances and losses on other holdings to offset gains.  This can take many years and restrict changes to portfolios. 

With the recent rise in markets, lower rates on gains for these investments and the potential of future increases, we believe that investors should consider selling now to realise capital gains on this tax year. 

This will allow portfolios to be restructured, banking gains and potentially providing protection against a future drop in markets.  The cost is capped at 20% of the gain, reduced to 10% for basic rate taxpayers (up to the higher rate income tax threshold), after personal allowances of £11,100 have been used. 

A debate about an acceptable level of tax is unlikely to reach a simple conclusion.  That said, we rarely have any requests to mitigate income tax liabilities on the basic rate of 20%.  If 20% income tax is generally seen as a reasonable level, there is a strong argument that this view should also apply to capital gains. Tax at 20% of a gain may not be a small figure but, in relative terms, the level of tax is historically low and we feel it is an acceptable cost to enable a fresh start for a portfolio.  This is likely to remain the case if there are no changes announced to capital gains tax in the Budget.

If you haven’t done so already, we recommend speaking to your adviser and seeking their views.

Phil Cook
Private Client Partner 

Opinions, interpretations and conclusions expressed in this document represent our judgement as of this date and are subject to change. Furthermore, the content is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or a solicitation to buy or sell any securities or to adopt any investment strategy.

Thomas Miller Investment is the trading name of the businesses in the Thomas Miller Investment Group. This note has been issued by Thomas Miller Wealth Management Limited which is authorised and regulated by the Financial Conduct Authority (Financial Services Register Number 594155) and is a company registered in England, number 08284862