By James W. Melhuish DipPFS EFA
Director, Pocknells Wealth Management
There is an old saying that the only certainties in life are death and taxes. In Britain, I’d suggest adding a third, whenever a new Prime Minister walks through the doors of Number 10, someone immediately proposes changing Capital Gains Tax.
With Andy Burnham now taking office, speculation has gathered pace around what the next Budget might contain. Whilst there are countless rumours circulating, one proposal appears to have gained more traction than most, aligning Capital Gains Tax with Income Tax.
At first glance, it’s an attractive idea. After all, why should someone earning £100,000 through employment pay a higher rate of tax than someone making the same amount from selling an investment? It is a question that sounds both logical and politically appealing.
The difficulty, however, is that financial lives are rarely as tidy as political soundbites.
The phrase “capital gain” often creates the image of a City trader making fortunes before lunch, but the reality is usually rather less glamorous. More often, it represents decades of patience. It is the entrepreneur who spent thirty years building a business before finally selling it. It is the investor who quietly accumulated wealth over several market cycles without trying to outguess them. It is the family who bought a property many years ago, maintained it, improved it and, almost accidentally, watched inflation and time do much of the heavy lifting.
A capital gain is not always income delayed. Quite often, it is risk rewarded.
That distinction matters.
Unlike employment income, capital has usually been built using money that has already been taxed, invested without any guarantee of success and left exposed to market fluctuations for many years. Anyone who has ever watched their investment portfolio during a financial crisis will tell you that the gains are only obvious in hindsight. The losses certainly feel very real at the time.
Of course, there is a perfectly reasonable debate to be had about whether the tax system should treat income and capital more equally. Successive governments have considered it, various think tanks continue to recommend it, and economists remain divided over whether higher Capital Gains Tax rates would actually raise more revenue or simply encourage people to hold onto assets for longer.
What is certain is that uncertainty itself has consequences.
Over the past few weeks I’ve lost count of the number of conversations that have begun with, “Should I sell now before the rules change?” It’s an understandable question, but perhaps not always the right one. History has shown that making irreversible financial decisions based on speculation is rarely a reliable long-term strategy. Newspapers are written to be read today. Financial plans are designed to work for decades.
That is why good planning has never been about predicting Budgets. If we’re honest, governments have a habit of changing tax legislation with the same frequency that the British weather changes its mind. The successful clients are rarely those who perfectly anticipate every announcement from the Treasury. They are the ones whose affairs are organised well enough that they can adapt when those announcements arrive.
If Capital Gains Tax were eventually aligned with Income Tax, there are numerous planning considerations that may become increasingly important. The timing of asset disposals, the use of pensions, tax-efficient wrappers, business succession planning and family wealth transfers could all deserve greater attention. None of these strategies exist simply to avoid tax. They exist to ensure clients make informed decisions within whatever rules Parliament ultimately decides to implement.
For accountants, this presents both a challenge and an opportunity. Clients will understandably turn to you for clarity amidst the headlines. Increasingly, however, those conversations extend beyond interpreting legislation and into broader questions about long-term financial decisions. That is where financial planning and accountancy continue to complement one another so effectively.
Whether Capital Gains Tax changes next year, in five years, or not at all, the underlying principle remains remarkably consistent. Tax legislation will continue to evolve. Markets will continue to fluctuate. Governments will continue to promise certainty before delivering something rather more complicated.
Our job is not to predict what the Chancellor may do next.
Our job is to ensure that, whatever happens, clients are already in a position to respond sensibly rather than react emotionally.
Because whilst tax policy changes with surprising regularity, good financial planning rarely goes out of fashion.
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The tax landscape will continue to evolve.
Good financial planning should evolve with it.
