THE new Lib-Con coalition didn’t waste any time after the election to show it is serious about lowering the UK’s enormous public debt. And it looks like a hike in capital gains tax (CGT) is on the cards in a bid to raise much-needed revenue.
So what does this mean for investors? Individual stocks, contracts for difference (CFDs) and all listed products are subject to CGT. For example, investors in exchange-traded funds (ETFs), covered warrants and autocallables will be affected by changes to the rules.
So far, nothing is set in stone. It is expected that CGT, currently at 18 per cent, could move towards marginal income tax rates. This means that for higher-rate taxpayers CGT could be 50 per cent. This would be one of the highest ever rates of CGT. In the past it has varied from 10-40 per cent, and there was once even a taper regime, whereby you paid less CGT if you held onto an asset for a minimum period of time.
Investors currently have a £10,200 exemption limit for CGT. But this could also change. In its election manifesto the Liberal Democrats recommended reducing this limit to £2,000.
Speculation about the timing of any changes to CGT has been misleading for investors, says Arabella Saker, partner at law firm Maurice Turnor Gardner. “It has been suggested that changes to CGT could come into effect on 22 June (the day of the emergency budget) and that it could be backdated. This is highly unlikely since we don’t even know if it would be constitutional to backdate a change in the tax. Also any changes are unlikely to come into effect until the next tax year on 6 April 2011.”
Since the political will is there to change the tax rules, how can retail investors make the most tax efficient investment decisions? Philip Adler, managing director of IG Markets UK, says that CFDs will remain attractive to some investors: “They are fairly easy to short and they charge relatively low commission so CFDs will still remain compelling.” Adler also notes that CGT is a symmetrical tax, so any losses you make on your investments can be written off your overall CGT bill.
In terms of listed products, Saker says that ETFs and covered warrants that give investors exposure to indices or multiple stocks should still remain attractive: “These products have a wide market exposure and will be a good way to access the market without paying CGT every time you buy or sell an individual stock,” she says. Investors can also include listed products as part of their ISA allowances, which is free from CGT. Spread betting could become more popular as a result of this since it is also CGT-free. This is good news for investors that don’t mind taking on the extra risk inherent within spread betting.
There is no doubt that the investment landscape is about to change. But the one thing to remember is not to panic-sell, especially when changes to CGT are yet to be written into the statute book.