'Triple tax lock' puts capital gains in the line of fire

Wealthy investors relieved by the election of a Conservative majority could yet face tax rises, advisers have warned, despite the party's commitments not to increase income tax, VAT or national insurance.

Gary Heynes, head of private client at Baker Tilly, said that with capital gains tax outside the "triple lock" ringfence, rates and reliefs on investment gains could be targeted by a government committed to balancing its budget by 2020.

"As growth returns to the markets, the government could see it as time to capture gains," said Mr Heynes. "It is only really the wealthy who pay CGT, so perhaps it is more [politically] palatable than other tax rises."

Capital gains tax is payable on profits arising from the sale of assets, including property and company shares, but primary residences are exempt for UK residents. Each taxpayer has an annual allowance - currently £11,100 - of tax-free capital gains.

While higher rate taxpayers pay CGT on gains at 28 per cent, basic rate taxpayers face a rate of 18 per cent. Before 2008, however, CGT was payable at a taxpayer's marginal income tax rate, meaning that higher earners paid up to 40 per cent in tax on their gains.

"It is possible that the headline rate could be raised and again aligned with income tax rates," said Mr Heynes. "As before, taper relief could allow longer term gains to be taxed at a lower rate."

Tax paid on capital gains raised £5.8bn last year, according to HMRC's estimates. Although this was 50 per cent higher than in 2013-14, it remains well below its peak of £7.9bn in 2008-09.

Andrew Collins, a partner at Charles Russell Speechlys, a law firm, said that following the "triple lock" commitment, the government may have little choice later this parliament but to target capital gains.

"It would be ironic if an unforeseen Conservative majority were to crack down on [CGT] reliefs," he said. "This was the very thing business owners felt would be introduced by a Labour-led coalition."

Mr Collins said that one way for the government to raise revenues would be to introduce an additional surcharge on company dividends for higher and additional rate taxpayers, who currently face effective tax rates of 32.5 per cent and 37.5 per cent.

Company directors and freelance workers, who are often paid through dividends rather than salary, would be primarily affected.

Entrepreneurs' tax relief, which allows business owners selling up to pay CGT at a lower rate of 10 per cent, could be curtailed dramatically, Mr Collins added.

The tax break has been criticised since official analysis revealed that it cost the exchequer £2.9bn in 2013-14, £2bn more than originally forecast by HM Revenue & Customs.

Having been extended under the coalition government from £2m to £10m, the lifetime limit for qualifying gains could now come under scrutiny, said Mr Heynes. "I think [the] 10 per cent [rate] is here to stay, but £10m of gains is questionable."

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"If anything, I can see the lifetime allowance [on tax-free gains] going up over the course of this parliament," he said.

The limited contribution of CGT to overall exchequer receipts - representing just over 1 per cent of an estimated £478bn in 2014-15 - make it an unattractive target for the government, Mr Shah said. "Is it worth tinkering with? Probably not."

The government expects CGT revenues to continue to rise, reaching £8bn in 2017-18, in part attributable to recent tightening of the regime. Since April, non-resident owners of UK property are no longer eligible for private residence relief (PPR) on any gains when they come to sell their home, for example.

Although the threat of the non-domicile regime being abolished lifted with the Labour party's electoral defeat, many wealthy foreigners could also face larger annual charges for shielding non-UK income from HMRC, said Mr Heynes.

He said it is possible that PPR could also be restricted for UK resident homeowners during the next few years, most likely by introducing a cap on tax-free gains that can be realised on the sale of a family home.

This would be more likely than a lifetime allowance, he added, which could reduce liquidity in the property market.

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