Capital Gains Tax Debate: Are Investors Facing the End?

A potential increase in Capital Gains Tax (CGT) is currently sparking significant discussions in the United Kingdom. The largest British stockbroker, Hargreaves Lansdown, warns that a rise in CGT rates without further reforms could deter an entire generation of investors and significantly hinder their market access. The background to these considerations is the government's effort to generate additional revenue of £40 billion through tax adjustments to strengthen public finances. This could particularly affect private investors, although not real estate investors, according to Sarah Coles from Hargreaves Lansdown. She warns that it may discourage private investors from investing in the market or disposing of existing assets. Currently, the CGT stands at 10 percent for basic-rate taxpayers and 20 percent for higher-earning investors. Rachel Reeves has been advocating since 2018 to align the CGT with income tax rates, which are significantly higher at 20 percent, 40 percent, and 45 percent. An increase of 5 percentage points would mean an investor with a return of £20,000 would have to pay an additional £850 in taxes, and an increase of 10 percentage points would mean £1,700 more. In addition to Hargreaves Lansdown, investment firm Abrdn has also expressed concerns. Alastair Black, head of savings policy at Abrdn, argues that tax inflation should be considered in a potential CGT increase. Furthermore, the annual allowance threshold should be restored to its 2022 level to cushion the tax burden. The discussions on raising the Capital Gains Tax also raise questions about the government's policy on promoting investments. Measures that hinder investment willingness could, according to Coles, undermine the government's credibility in supporting British businesses and promoting long-term financial resilience. The UK's financial regulator, the FCA, also warns that holding too much cash reduces both returns and capital available for investment purposes. Prime Minister Rishi Sunak recently refuted speculation about a drastic CGT increase to as much as 39 percent. However, a rate hike seems likely according to recent reports, as over 350,000 investors pay Capital Gains Tax on asset sales annually, and projected CGT revenues are expected to reach a record high of £23.5 billion by 2028/29.