The investment climate during the COVID-19 pandemic has been uncertain, to say the least. Stock markets have plunged, recovered a little then fallen again. Banks have come under extreme pressure and governments have been forced to provide such profligate bailouts and financial support that borrowing is at a 60-year high. Into the middle of this already muddled investment climate, the chancellor of the exchequer, Rishi Sunak, announced a consultation on a shake-up of the capital gains tax laws.
What is Capital Gains Tax?
Capital Gains Tax is a tax levied on the profit when you sell an asset that increases in value. Personal possessions worth more than £6000 such as a second home or in certain cases your main home, shares held outside of an ISA and business assets are all liable for CGT.
The annual tax-free allowance on capital gains before tax is levied is currently £12,300. The rate of tax for basic ratepayers is 18% for property and 10% on other assets, while people on the higher tax bands pay 28% on property and 20% on other assets.
What are the recommendations of the report?
The report, commissioned by the Chancellor and prepared by the Office of Tax Simplification, suggests that CGT is aligned more closely with income tax. UK income tax is paid at 20% for basic rate taxpayers, 40% for higher rate payers and 45% for additional ratepayers. This would double the tax burden on share and asset sales. The report also suggested that the tax-free allowance be lowered to £2,000-£4,000 from the current rate of £12,300.
A rough estimate from the report authors suggested £14 billion could be raised with the changes. However, this projection omits the behaviour changes that would inevitably take place as people try and maximise their assets and minimise the effect of the tax rise.
Does this extend the reach of Capital Gains Tax?
Even though the report published is just at the consultation stage and all the recommendations are merely suggestions that the chancellor can choose to ignore, the effect of the report is already being felt.
Investors are looking to conclude sales of companies or shares sooner than planned, and landlords with second home investments could skew the property market in a bid to avoid the tax hike. Personal possessions that have been bought as investments like art, wine and other alternative assets would also be subject to the doubling of CGT if the measures are put in place.
Not the only tax raid
The chancellor is currently still pumping money into the economy to try and save and create jobs. When the taps are finally turned off, the financial impact of these spending sprees will become very evident. The government is facing an economic hole and it will need to fill it with tax receipts, either from income taxes, VAT, business taxes or other taxes like capital gains tax.
Sunak has made it clear that the economic impact of the COVID-19 pandemic will be felt for a long time to come. He said the country will suffer the worst economic decline in 300 years, and acknowledged that this will deal lasting damage to jobs and growth. The knock-on effect of job losses will be felt in the property market, on businesses and in consumer homes.
The investment environment
The capital gains tax proposals are just a starting point for ultimately dealing with the financial hangover of the COVID-19 crisis. The investment environment, which has been under extreme pressure as markets slumped in the midst of the pandemic, remains very uncertain. Job losses and the end of the stamp duty holiday will ultimately affect property demand.
Higher taxes will affect consumer spending, impacting those businesses and their shares that have at least survived through the lockdowns. The chancellor’s raid on capital gains tax adds another point of pressure on people trying to protect their assets in these difficult times.
Tax-free gold
Investing in physical gold can save buyers two types of tax. Until 20 years ago, gold attracted value-added tax in the same way as other goods and services did, but this changed in 2000 when the UK government harmonised the tax treatment of physical gold with the rest of the EU. This was a recognition of the precious metal as an investment asset on a par with stocks and shares and gave investors a comparable alternative safe-haven investment. The stipulation remains that only investment-grade gold is VAT exempt. This means the gold must be of a particular type (specific bars or coins) and of a minimum standard of purity
Importantly for the potential change in the tax regime, certain gold coins like Gold Sovereigns and Gold Britannias are also capital gains tax-exempt for UK residents because they are classified as legal tender here. This has always enabled gold investors to bypass CGT and will become even more important if the rate is doubled as the report suggests.
But capital gains exemptions are not the only reason to buy physical gold. The economic impact of the pandemic has already been forewarned, and gold has a long history of thriving in times of economic uncertainty. The gold price has surged over 22% since the early days of the pandemic, at one point having risen 40% at the height of the crisis, as investors looked for a safe-haven in the storm.
Another advantage of physical gold is there is no counter-party risk, of the company or bank going bust. In an actual financial crisis, bank deposits are only protected up to £85,000 in the UK, and a sudden market crash or major banking crisis could cause overstretched institutions to fail.
If, or rather when, taxes are raised to pay for the pandemic, either through a CGT rate increase or other income or business tax raids, you can make your portfolio safer by buying physical gold.
