What will happen to CGT rates?

Our prediction

CGT rates are likely to rise but will stay lower than the higher and additional income tax rates.

We have noted above the likelihood, almost certainty, that anti avoidance rules will be announced that target conversion of income to capital.

The reason for this is simple: the difference in rates offers a clear incentive to convert income to capital:

• currently 22%
• from 6 April 32%

So will CGT rates be increased to reduce or remove this apparent discrepancy? There has been widespread speculation that CGT rates might be increased and possibly even brought back into line with income tax rates generally. There is a wide range of possibilities from:

• the possibility of increased CGT rates is just idle speculation coming so soon after wholesale reform of CGT; to
• the Treasury is happy for the possibility of full rate alignment with income tax to be floated, if only as a 'softening up' exercise to prepare for a major hike in CGT rates.

The truth probably lies somewhere in between: the rate is most unlikely to be aligned with income tax for a number of reasons.

• The nature of the taxes is fundamentally different. CGT taxes long term profits, including an element of inflation and keeping a lower rate of tax on genuine capital appreciation provides an incentive to longer-term investment.
• The experience of taper relief suggests that lower rates reduce the incentive for avoidance, so on a practical level, keeping the rate to a level where the benefit of avoidance is less than the risks and potential costs involved, is likely to pay greater dividends to the Treasury, not least because its cashflow will look much better if CGT is paid promptly at a rate that is not wholly unacceptable, rather than delayed while arguments rage about the efficacy of avoidance schemes.
• As was noted above, anti-avoidance rules are in the pipeline aimed at preventing artificial conversion of income to capital.

But other tax rates are being increased so will CGT be left alone? Probably not but don't expect swingeing increases in the rate of CGT. The current CGT rate is just below half of the top rate of income tax but there's a new top rate coming in. Keeping the rate of CGT in proportion to the top tax rate would give a new CGT rate of 22.5% and an increase to more than 25%, half the top income tax rate is probably out of the question.

Alternatively the Chancellor may decide that CGT is in danger of living up to its original billing as a 'simple tax' and in need of spicing up again. Maybe retaining the current rates or something close to them (20% basic rate, perhaps) but adding a higher rate for gains over a certain threshold, for which £1,000,000 seems to be the favourite figure, being the lifetime limit for entrepreneurs' relief. The one thing that is certain is that whatever he does with CGT that tax alone will not raise anything like the amount of additional revenue required to balance the books.

The temptation is to summarise this in the titles of popular songs of startlingly different quality.
The starting point is 'Money' and the line "Gimme money. That's what I want.”
But when it comes to increases in CGT rates and some of the wilder “It ain‟t necessarily so”.
But inevitably the conclusion is probably a cheap populist line suitably and trashily expressed as “The only way is up!”