Healey and Burnham warned against hiking capital gains tax in Budget

Andy Burnham and John Healey have been warned that any attempt to increase capital gains tax during the Budget will end in failure.

The government has recorded a tax take of £198m in capital gains tax (CGT) for August, up £8m against the same time last year.

There are rumours that next month’s budget could include a plan to raise CGT in a bid to bring in more money to Treasury coffers.

But one expert has warned that “the reality is rarely as straightforward as the forecasts” – suggesting that straightforward planned increases to the tax take will undermine the chancellor’s actual attempts to balance the books.

CGT is seen as one of the most difficult income streams for the government to bank on, due to the nature of how it is paid and the fact people are more willing to change their behaviour because of it.

Broadly speaking, CGT is payable when assets are sold off at profit, such as property, shares in companies, cryptocurrency or other possessions and asset types.

There is a £3,000 personal allowance but, above that level, tax could be due at 18 or 24 per cent rate, depending on your tax band and other factors, including other allowances used.

Recently there has been some suggestion that rates could shift upwards, which in numbers terms would increase the amount of tax due. But what economists and experts have actually seen happen is that investors or other asset-holders will simply keep hold of their possessions until a more favourable tax picture emerges. As tax is not due until the assets are sold at a profit, that means the tax take is in fact reduced from the normal level.

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Rachael Griffin, tax expert at Quilter, said: “One of the more persistent Budget rumours is that the government could seek to align Capital Gains Tax rates more closely with income tax rates. On paper, such a move could significantly increase the amount of tax due on investment gains and potentially deliver a sizeable boost to Treasury revenues.

“However, Capital Gains Tax is one of the most behaviourally sensitive taxes in the system.

“Monthly receipts can be highly volatile and investors often have considerable control over when gains are realised. Faced with higher rates, some may accelerate disposals ahead of any changes while others may simply hold assets for longer or alter their investment behaviour altogether.

“That means while aligning CGT with income tax rates could appear to raise substantial sums on paper, the eventual tax take would depend heavily on how investors respond. History suggests the reality is rarely as straightforward as the forecasts.”

Sarah Coles, head of personal finance at AJ Bell, pointed out the trend has already started to emerge.

“This is typically a slow month for capital gains tax receipts, but increasingly is a busy one for tax speculation,” she said. “In August, it’s up - however, overall, since April the Treasury has taken less in CGT than a year earlier.

“It’s a useful demonstration of the fact that when it comes to CGT, tightening the screw doesn’t necessarily generate more tax, because people will change their behaviour – they’ll sell up ahead of changes, and then hoard assets for as long as possible afterwards to avoid a hefty tax bill.

“Anyone pushing for such a move might want to bear these latest figures in mind,” Ms Coles added.

As for why CGT is being looked at as an avenue to raise funds, Susannah Streeter, chief investment strategist at Wealth Club, says it could be the on-paper counterbalance to raising the personal income allowance – the point at which people start paying tax on their earnings.

“If the government is looking to put more money into people’s pockets by reducing their income tax bill, it would need to find the money elsewhere, and CGT is increasingly being talked up as a potential source,” she said.

While property and other physical assets have their own places and requirements for people’s buying and selling, assets such as shares and other investments can be held inside tax-efficient wrappers such as an ISA or a SIPP for most people, which avoid tax bills upon sale.

In addition, staggering certain sales either side of key dates, such as the financial year, can at times allow bigger amounts to be sold without incurring a hefty all-at-once tax bill, as someone could use up their £3,000 capital gains allowance in each financial year.