Rumoured changes to CGT already appear to be creating selling pressure. Could it derail the recovery in the UK market?
- There is mounting concern that CGT changes could create selling pressure
- The amount raised from an increase in CGT is uncertain
- A greater risk may be changes to business property relief
Just as the UK stock market appeared to be getting back on its feet, it has been hit with another potential shock. Rumours that the UK government will use a rise in capital gains tax to help fill a fiscal £22bn ‘black hole’ has prompted concerns over a wave of selling. But is the problem as significant as it looks?
Wealth managers report that clients with significant uncovered gains in their portfolios are selling up, keen to avoid a potential rise in the top rate of CGT. The current rate of 20% for non-property assets looks anomalous and it would be an obvious move for the incoming government to change capital gains tax rates to match income tax rates.
The government raised around £17bn in 2022/2023 from capital gains tax, a record year for receipts. There has been a fourfold increase in ten years. This has happened as rates have dropped, suggesting that lower rates may have encouraged more people to realise gains.
In this respect, the amount raised by an increase in capital gains tax is perhaps more uncertain than that raised from other taxes. If CGT rates are raised significantly, asset owners may simply not sell, which would depress tax receipts. That said, cuts to taper relief and the personal CGT allowance appear to have boosted receipts historically. Equally, it may be that the rumours about a rise have done their job – prompting people to sell and boosting short-term CGT revenues. However, this might come at the expense of long-term revenue raising.
In the meantime, parts of the market may be hit by worried sellers moving out. It is thought that this may have contributed to the significant outflows from the UK All Companies sector in April and May. Investment trust managers also report selling pressure. By definition, the most ‘at risk’ areas are those that have made the strongest gains. That puts technology in the spotlight.
However, there are mitigating factors. Its impact on the market also depends on clients not reinvesting. This is possible – cash rates are still relatively high – but it seems unlikely. Cash rates are coming down, and are likely to come down further. Older investors will continue to need the income stock market portfolios can provide. It may be that capital is simply redeployed in equities elsewhere. The UK market, currently on an upward curve, could even be a beneficiary.
A greater risk may arise if the government looks to tackle some of the inheritance tax planning allowances, such as business property relief. This is a major support for the AIM market, and its removal could dent an already vulnerable market. Investors will be watching the October budget with particular interest.
