CGT changes could affect millions of long-term savers

Millions of average long-term savers could be dragged into the CGT net if the government's tax changes include significantly reducing the tax-free allowance, analysis from Fidelity International shows.

Fidelity is urging the government to leave the tax-free allowance at £10,100 when it increases CGT in its emergency Budget on 22 June to avoid harming existing savers with modest long-term gains and to ensure that people are not discouraged from making further savings for their future.

While the government has remained silent on the allowance so far, the Liberal Democrats have previously proposed reducing it to just £2,000 which would significantly increase the number of people liable for the tax.

Only 1 in 131 taxpayers (247,000) paid CGT in 2007-08 but Fidelity estimates that this number could be in the millions if the tax-free allowance is reduced to £2,000.

Fidelity's analysis shows its average direct and advised clients in the UK have managed to save up a pot of around £18,000 in investments outside tax-free wrappers such as ISAs.  As demonstrated in the table below, based on annual growth of 5%, the average saver does not currently have to pay CGT if they sell or switch their investments within the first nine years.

However, if the CGT allowance was reduced to £2,000, CGT would become due after just two years, regardless of whether the investor is a pensioner, a basic rate taxpayer or high net worth individual.  Savers who have never previously had to complete a tax return may now have to do so, with the amount they owe dependant on how much the government raises CGT in the next Budget.

Paul Kennedy, head of tax planning at Fidelity, says: "The upcoming increases in the rate of CGT have been subject of much attention in relation to wealthy individuals. However, it should be remembered that the allowance is relevant to all investors, not just those on higher incomes.

"Our analysis shows that decreasing the tax-free allowance will result in millions of average long-term savers being dragged into a net that many believed was being set only for the rich. Such a change is likely to damage particularly older people who have saved prudently to supplement their income in retirement and gradually sell down their holdings.

"The only way to avoid triggering a CGT liability in this situation would be by switching investment from one fund to another as soon as the gain approaches £2,000.  In doing this many people could start to compromise their long-term plans and investment aims simply to avoid CGT and the misery of the tax forms that they will be forced to complete. The CGT allowance must be maintained at a level where it neither produces disproportionate burden on the modest investor nor distorts or compromises sensible long-term investment plans.

"The Lib Dems may consider £2,000 to be a reasonable allowance but you only get one allowance when cashing-in after years of investing and if you've been saving for 15 years, it would only amount to just over £100 per year. If it does drop, then at the very least, you ought to be able to carry your used annual allowances forward for the time when you need to draw your savings."