News & Views

Tax Changes Hit Investors: Understanding the Impact

Investors face increased tax burdens due to recent CGT changes.

Landlords and investors are facing a harsh tax reality due to changes initiated during the New Labour era and subsequent government actions.

Formerly, capital gains tax (CGT) considered inflation, ensuring investors paid tax only on their actual gains, not inflation on top. This changed in 1998 when Tony Blair’s government scrapped indexation for individuals.

Gordon Brown then introduced taper relief, incentivising long-term asset holding. However, this system was complex and was eventually abolished in 2008 by Alistair Darling.

Since then, there have been minimal adjustments to CGT.

Presently, investors can earn up to a specified amount annually before facing a flat-rate tax on gains, varying with income and asset type.

Recently, due to rising inflation and substantial cuts to annual exemptions, the CGT system has become increasingly punitive. The allowance plummeted from £6,000 to £3,000, pulling more individuals into the tax net.

This cut represents less than a quarter of the allowance from two years ago, exacerbating the tax burden.

The consequence is that investors may be taxed on gains even when, post-inflation, their return is negative.

For instance, property prices have increased by 10%, while the FTSE All Share has risen by 11%, yet inflation, as measured by the Consumer Prices Index, has surged by 21%. This erosion in purchasing power means investors are effectively losing money.

Consider a scenario where an investment property bought three years ago for £450,000 is sold for £495,000 today. Despite a nominal gain of 10%, the real return, adjusted for inflation, is -11%.

Tax is then applied to this nominal gain, resulting in a significant tax bill, especially for higher-rate taxpayers.

While the Budget offered a slight reprieve by reducing the CGT rate for second homeowners, overall, taxpayers face record CGT payments. In the 2021/22 tax year, a staggering 394,000 taxpayers collectively paid £16.7 billion in CGT, the highest figure to date.

This tax burden escalation, particularly for traditional Tory supporters, coupled with a perceived unfavourable stance towards risk-takers, represents a contentious issue.

As tax liabilities rise, it’s becoming increasingly crucial for investors to navigate the evolving tax landscape with prudence.

At Wells Gibson, we understand the importance of managing the ever-changing tax landscape, especially for investors facing increased tax burdens. Our team are here to help you understand the impact of recent CGT changes and devise strategies to minimise your tax liabilities while maximising your financial goals.

Whether you’re a landlord, investor, or someone concerned about the implications of rising CGT payments, we can provide tailored advice and solutions to optimise your financial situation.

Contact Wells Gibson to schedule an Exploration Call and ensure that you’re equipped to make informed decisions in the face of evolving tax regulations.