Yahoo Finanzas Investors face double tax blow after latest Tory raid
Landlords and investors face paying tax on their losses because of tinkering under New Labour, as well as a government raid on profits.
Capital gains tax used to take into account inflation as measured by the Retail Price Index, which meant investors only paid tax on their real gains, and not inflation on top.
This was the case from 1982 up until Tony Blair’s government scrapped indexation for individuals in 1998.
With inflation low, former chancellor Gordon Brown decided that indexation was unnecessary and replaced it with taper relief, a system that rewarded people for holding on to assets for longer.
But taper relief – which sheltered more of the gain from tax the longer an investment was held – made CGT even more complicated, and so Alistair Darling eventually abolished it in 2008.
Since then, there has been very little tinkering with capital gains tax. Today, investors can earn up to a certain amount each year – their annual allowance – before having to pay tax on their gains at a flat rate, which varies depending on your income and the asset you’re disposing of.
But the current system has become more penalising of late due to rampant inflation and dramatic cuts to this annual exemption.
Jason Hollands, of stockbroker Bestinvest, said: “While the effect of the removal of inflation-adjusting capital gains has gone largely unnoticed due to low inflation, the inflationary surge that began in 2021 has had a major impact when coinciding with aggressive cuts to capital gains tax exemptions.”
The capital gains tax allowance was brutally slashed from £6,000 down to £3,000 last month, a move that will pull growing numbers of people into the tax net.
The exemption is now less than a quarter of what it was two years ago, when it stood at £12,300.
The impact of this dramatic cut is that investors are being taxed on “gains” even when the return, post-inflation, is in fact negative.
Over the past three years, the average property price has grown by 10pc while the FTSE All Share is up 11pc. Yet over the same period, the Consumer Prices Index – the most-used barometer of inflation – has soared by 21pc.
“Investment assets have faced an uphill struggle just to maintain their real value in the face of inflation,” Mr Hollands said.
This decline in purchasing power means someone who bought an investment property three years ago for £450,000 and sold it today for £495,000 would have made a return of -11pc, due to the value of money eroding by 21pc in real terms, while their nominal gain was just 10pc. As well as suffering a post-inflation loss, the investor would then have to pay tax on their £45,000 gain.
Only £3,000 of this would be shielded from tax, so assuming the investor is a higher-rate taxpayer the bill would come to £10,080 – almost £1,000 more than if they had sold up two years ago when the exemption was £12,300.
Basic-rate taxpayers are charged 10pc on their profits from selling shares, whereas higher-rate taxpayers are charged 20pc. The rates are 18pc and 24pc respectively for sales of property.
The Budget contained a modest gift for second home owners in the form of a capital gains tax rate cut. Landlords and second home owners disposing of a property now pay 24pc as opposed to 28pc – a saving of around £3,000 for a higher-rate taxpayer selling a £100,000 house.
Yet despite this, taxpayers have been paying more capital gains tax than ever before.
The latest figures show that a record 394,000 taxpayers forked out £16.7bn in capital gains tax in 2021-22, a higher sum than in any year previously.
Mr Hollands said: “For many traditional Tory voters, the rising tax burden under the Conservatives is one of the most contentious issues, with ballooning numbers of people paying the higher rates of tax, record inheritance tax receipts and what feels like a hostile attitude towards risk takers.”
