Chancellor John Healey will not hike capital gains tax (CGT) in the upcoming Budget on 28 October, according to reports.
It had previously been rumoured that he would look to increase CGT to bring the tax in line with income tax but Healey has ruled out such a policy change, Treasury sources told the FT and The Times.
The prospect of changes to CGT rules had caused some consternation, particularly among investors. Facing a fiscal black hole, rising gilt yields recently have added pressure to the Treasury, with interest payments now much larger on newly issued debt.
Labour’s manifesto promised not to raise income tax, VAT or National Insurance, so capital gains was viewed as tax that could be used to increase the country’s coffers.
Rob Morgan, chief investment analyst at Charles Stanley Direct, said ruling out a further increase to capital gains tax will provide reassurance to business owners and investors ahead of the Budget.
“The decision suggests the Treasury is increasingly focused on the risks of behavioural change rather than just the headline rate. Higher CGT rates can encourage investors to delay asset sales, potentially reducing the amount of tax ultimately collected,” he said.
“It also reflects broader concerns about economic competitiveness. At a time when the government is trying to encourage investment and growth, another rise in CGT could send the wrong message to entrepreneurs, business owners and investors.”
Michael Healy, chief executive of IG Consumer, said the decision to rule out CGT reform was “welcome” and sends a “much-needed” positive signal to investors.
Investing should be for the long term, he argued, but this requires confidence that the rules under which you are investing are not being changed all the time.
“Over the past decade, investors have faced repeated changes to investment taxes and rules,” he said, which could have put some people off investing. But it is not just changes that come into force that create uncertainty – investors also have to navigate proposals that are subsequently changed or dropped.
“The government must now build on this by committing to a stable investment tax regime that gives more people the confidence to invest for the long term. This is also one of the best ways the government can reduce reliance on the state and strengthen the UK’s fiscal position,” he said.
Other CGT options
Sarah Coles, head of personal finance at AJ Bell, said taking CGT changes off the table at the upcoming Budget will turn people’s attention to other potential policies.
While he has backed down from upping rates, Healey could cut the annual exempt amount again. Coles described this as “fraught with so many difficulties it might not be something the chancellor wants to rush into”.
In particular, she noted that it could also put people off investing outside of tax wrappers such as ISAs and SIPPs.
Another change that has been mooted before is to make CGT payable on death, a suggestion from the now-defunct Office of Tax Simplification.
“This isn’t an easy or straightforward change, so the chancellor is unlikely to be in a rush to embrace it if he has other options,” said Coles.
“It would mean that rather than gains resetting on death, estates could face a horrible tax bill. Those who hoarded assets to get around the current tax rules could face enormous bills at the worst possible time. And those who were planning to do so would need a complete rethink.”
It would also raise issues around the blurred lines between CGT and inheritance tax, with a double hit to estates likely to be politically unpopular and met with “serious opposition”.