Sell 'cherished' holdings to guard against 'CGT hike'

Sell 'cherished' holdings to guard against 'CGT hike'

Selling some of the most “cherished” holdings in a portfolio is an efficient way to guard against an increase in capital gains tax, according to Simon Temple-Pedersen, investment director at wealth manager JM Finn.

Mr Temple-Pedersen, said capital gains tax is largely “discretionary” in that the bill is only triggered when the client sells an asset.

He said many clients typically hold onto high performing investments for a long time, as they don’t want to sell and cause a CGT bill.

But he believes the rates of capital gains tax could be raised in the near future to be in line with income tax rates, so for a higher rate tax payer that would mean a tax rise from the current 20 per cent to 45 per cent.  

Chancellor Rishi Sunak has commissioned a review by the Office for Tax Simplification (OTS) of the current capital gains tax rules as he seeks measures to raise revenue as government borrowing levels have risen sharply in response to the pandemic. 

Mr Temple-Pedersen said: “CGT has long been a sensible reason to hold on to those 'cherished' holdings – often over-sized – which can make managing a portfolio that bit harder, especially when trying to manage risk and investment objectives within a diversified portfolio. 

"Whilst we can often advise clients of the merits of top-slicing such holdings, some have been reluctant to crystallise what is otherwise an avoidable liability to tax.

"Now might be the time for the head to take over from the heart and take a strategic look at those holdings that may well have been in the family for a long time, but may be impinging on the balance of a long term portfolio.”

In the most recent tax year capital gains receipts came to £9.5bn. Of this, 40 per cent came from fewer than 1 per cent of those who paid the tax. 

Chris Etherington, tax partner at RSM, said: "Influencing the behaviour of this relatively small number of taxpayers could have a big impact on the level of CGT receipts.  

"Ultimately, these taxpayers can choose not to sell their assets and so not trigger any CGT if they perceive the rate to be too high.

"The statistics also highlight how tax receipts have ebbed and flowed historically in response to changes in the CGT rate.  

"Tax rates alone are not the only factor, as the wider economy impacts on asset values. However, looking at some of the key CGT rate changes in more recent times, a pattern emerges whereby an increase in CGT rates appears to drive down receipts and a cut in rates pushes them up.  

"It can also be seen that from 2012 onwards, CGT receipts rose substantially, perhaps influenced by the decision in 2011 to increase the lifetime allowance for Entrepreneurs’ Relief to £10m per person."