Tax speculation is intensifying ahead of the Budget as investors weigh the prospect of higher taxes on investment gains against an increasingly constrained fiscal backdrop.
The latest public finances figures have added to pressure on the government. Public sector borrowing reached £18.3bn in August, around £3.5bn above the Office for Budget Responsibility’s forecast, highlighting the difficulty facing Chancellor John Healey as he seeks to balance spending commitments with limited fiscal headroom.
Against that backdrop, attention is turning towards the tax system and the possibility that ministers could seek additional revenue from investors.
Reported plans to raise the £12,570 personal income-tax allowance could further complicate the government’s calculations. While increasing the threshold could reduce the tax burden on some households, the resulting loss of revenue would potentially need to be offset elsewhere, prompting renewed speculation that Capital Gains Tax could come under scrutiny.
No specific changes to Capital Gains Tax have been confirmed, and speculation ahead of a Budget does not necessarily translate into policy. Nevertheless, investors are assessing how potential reforms could affect the taxation of investment returns.
The issue is particularly relevant for entrepreneurs and investors using government-backed tax-advantaged schemes. The Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS), for example, provide a combination of income tax, inheritance tax and capital gains tax relief, subject to eligibility requirements and the relevant scheme rules.
For investors, the prospect of tax changes adds another consideration to portfolio planning, but tax speculation alone should not determine broader investment decisions.
Instead, a review of existing holdings and available tax allowances could help investors establish whether they are making full use of the reliefs and tax shelters currently available to them.
The uncertainty reflects a wider dilemma for the government. Higher borrowing has narrowed the room for manoeuvre at a time when ministers face competing demands for public spending and pressure to maintain fiscal credibility.
Any changes to investment taxation would therefore need to be considered alongside the government’s wider approach to raising revenue and managing the public finances.
For investors, the immediate challenge is distinguishing confirmed policy from Budget speculation. Until the Chancellor sets out the government’s plans, assumptions about Capital Gains Tax remain precisely that: assumptions.
But with borrowing running ahead of official forecasts and pressure building to identify additional sources of revenue, the tax treatment of investment gains is likely to remain firmly in focus as the Budget approaches.
Susannah Streeter, Chief Investment Strategist, Wealth Club said: “Tax speculation is ramping up ahead of the Budget, especially given the latest snapshot of the government coffers shows Prime Minister Andy Burnham and Chancellor John Healey are walking an increasingly tricky tightrope when it comes to the public finances.
That is prompting fresh speculation about a potential increase in Capital Gains Tax, particularly if reported plans to raise the personal income-tax allowance from £12,570 become a reality. If the government is looking to put more money into people’s pockets by reducing their income-tax bill, it would need to find the money elsewhere, and CGT is increasingly being talked up as a potential source.
For investors, the prospect of a higher CGT bill could mean some simply decide not to sell assets and hang onto them instead. But there are alternatives, including tax-efficient investment schemes that can shelter returns while also directing capital towards British businesses, laying the seeds for future growth.
Government-backed venture capital schemes support young businesses which are seen as crucial to driving economic growth and the creation of high-value jobs for the future. Investing in these schemes is a bit like following in the footsteps of angel investors, but rather than backing a single start-up, you’re spreading your investment across a portfolio of young, ambitious businesses.
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