When to ring the capital gains tax alarm bell
Over the last decade, taxpayers in the UK and the US have become used to a stable tax environment. Capital gains tax rates and the highest rate of income tax have actually been reduced during the last 10 years. It has been a relatively benign environment, notwithstanding the alarm bells ringing a year ago with the threat of a Jeremy Corbyn-led government.
The world is a fundamentally different place to that of a year ago – the national debt in the UK now exceeds 100% of GDP – a level not seen since the early 1960s. The 10-year UK gilt is now trading at a yield of 0.32% which indicates that the UK can issue new bonds today for an interest cost of 0.32% per year. Casting one’s mind back to 2008, the UK government could borrow at 5%. Said another way, if the government can afford to pay £50mm in interest charges per year, in 2008 they could borrow £1bn whereas today they can borrow £15bn (for the same interest charges).
It is no wonder they are gorging on debt, but they have little choice. One must remember that in 10 years they either need to pay down or refinance the debt at the interest rate in force 10 years from today (which might not be as low). Paying the debt down seems like a pipe dream – the only way that this debt can be reduced is if inflation comes back with a vengeance and makes the real cost of paying down the debt possible.
So, the real question is what policy position Rishi Sunak will take to reduce the UK debt burden over time. Will he push through tax rises, adopt austerity politics again or assume the US mantra of spending your way out of a crisis?
There has been much chatter recently about potential increases in capital gains tax rates, sparked by the recent report from The Office of Tax Simplification.
Their suggestions are wide ranging and, at the moment, are just suggestions. However, the Press have picked up on the potential narrowing of the bands between Capital Gains Tax and Income Tax. While this is just speculation it is worth noting the capital gains tax landscape elsewhere in the world. In the US the capital gains tax rate is 23.8% for high earners, but if you add in the average State rate this clips up to 28%. The average rate across Europe is 19.5% and there are some countries that do not charge capital gains tax (Belgium, Czech Republic, New Zealand, Singapore and Switzerland).
Changes to US capital gains tax rates hang in the balance. If the Senate has a Democrat majority, it is likely that US capital gains tax rates will increase. If the Senate remains Republican, far-reaching changes to capital gains taxes look unlikely.
With this backdrop, we believe it is likely that the UK capital gains tax rate might increase and the US Federal rate will stay the same.
Investors should consider the unrealised capital gains position in their investment portfolios (and for American citizens in the UK – the gains are most likely larger due to the sterling depreciation) and consider whether it is worth crystallising those gains, paying taxes at 20% versus a higher rate at some point in the future. The key dates to monitor are January 5th (Georgia state run-off) which will determine a Democrat or Republican senate and the UK Budget in the spring (date currently unannounced).
Set your alarm.
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