Before the Budget: Why Savers Are Watching Capital Gains Tax

5 min read

In four weeks the Chancellor will deliver the first Labour Budget since 2010. Rachel Reeves set the date of 30 October back in July, alongside a warning of a £22 billion gap in this year's public finances. The message since then has been consistent. In late August the Prime Minister told the country the Budget would be painful. Savers have heard it. The tax most of them are asking about is Capital Gains Tax.

What the Chancellor said in July

On 29 July Rachel Reeves told the House of Commons: "I have inherited a projected overspend of £22bn." She described it as a hole in the public finances today rather than a problem for the future. In the same statement she ended the Winter Fuel Payment for pensioners who do not receive Pension Credit, starting this winter.

Pensioners who do receive Pension Credit keep the payment of £200, or £300 where someone in the household is over 80. For many older savers this was the first sign of how the new Government would treat people with savings and modest incomes. The £22 billion figure was the net gap. The Treasury put the total pressure on this year's spending at £35 billion, before allowing for the reserve that is normally set aside for emergencies.

She also repeated the promise that limits her choices. "We will not increase National Insurance, the basic, higher, or additional rates of Income Tax, or VAT," she said. In the same breath she warned that the Budget would involve "difficult decisions" across spending, welfare and tax.

Why Capital Gains Tax is in the frame

The Government pledged before the election not to raise the rates of income tax or National Insurance on working people. That rules out the largest sources of revenue. What remains are the taxes on wealth that has already been built: Capital Gains Tax, inheritance tax and pension relief.

Reports through September suggested that Capital Gains Tax rates could move closer to income tax rates. Nothing has been confirmed. Nothing will be until the day itself. But the direction of travel is not hard to read. When a government needs money and has ruled out the obvious levers, it looks at savings.

The idea is not new. In November 2020 the Office of Tax Simplification, asked by the then Chancellor to review the tax, published a report suggesting fewer rates and closer alignment with income tax. Its reasoning was simple. Because gains are taxed at lower rates than income, people have a reason to turn income into gains. Aligning the two would remove that reason. It also suggested cutting the annual allowance to around £5,000. At the time the allowance was £12,300. The cut has since gone further than the report proposed.

Where the rules stand today

Capital Gains Tax is currently charged at 10% for basic rate taxpayers and 20% for higher rate taxpayers on most assets. Residential property carries higher rates of 18% and 24%.

The annual allowance has already been cut hard. Two years ago the first £12,300 of gains each year was exempt. That fell to £6,000 in April 2023 and to £3,000 in April this year. More people now pay the tax on smaller gains.

How much the tax raises

HMRC published its latest figures in August. In the 2022 to 2023 tax year, 369,000 taxpayers paid £14.4 billion of Capital Gains Tax on £80.6 billion of gains. Both figures were lower than the year before, with the amount owed down 15% and the number of taxpayers down 8%.

Property is a growing share of the bill. Tax owed on residential property gains rose 7% to more than £1.9 billion, paid by 149,000 people. These figures show who pays the tax: people selling a second home, a buy to let flat or shares built up over decades.

For the Treasury, a tax raising around £14 billion is not large next to income tax. That is partly why it is attractive. A change in rates can be presented as a tax on the wealthy, even though the shrinking allowance now catches many ordinary savers.

A tax on the falling pound

There is a monetary side to this that is rarely discussed. Capital Gains Tax is charged on the gain in pounds, not on the gain in real buying power. When the pound loses value, the price of almost every asset rises in pounds. Part of that rise is not a gain at all. It is simply the currency shrinking. The tax is charged on it anyway.

The state of the public finances makes this more pressing. Public sector net debt reached 100% of GDP at the end of August, the first time since the early 1960s. A government carrying that much debt has two quiet ways to manage it. It can let inflation erode what it owes. It can also tax the paper gains that inflation creates. Savers pay for both.

Gold's record month

Gold has been reading the same signals. On 18 September the Federal Reserve cut US interest rates by half a percentage point, its first cut since 2020. The Bank of England held Bank Rate at 5% the following day, with UK inflation at 2.2% in August.

Gold set a string of new record highs in September, the latest on 26 September. The quarter was its strongest since early 2016. Over the first nine months of the year gold rose by more than a quarter in dollars and by around a fifth in pounds.

Those gains are a reminder of what gold measures. Its price in pounds rises as the pound buys less. Central banks know this. They have been buying gold at a historic pace for the past two years.

The coins outside the debate

Whatever is announced on 30 October, one rule is worth knowing now. Britannias and Sovereigns are UK legal tender. Gains on them are exempt from Capital Gains Tax for UK residents. There is no allowance to use up and no gain to report on these coins.

The exemption is set in law, not in a Budget speech. HMRC's Capital Gains Manual states that Sovereigns minted in 1837 and later and Britannia gold coins are currency. Like all sterling currency, they are exempt under section 21 of the Taxation of Chargeable Gains Act 1992. Gold coins that are not UK legal tender, such as the Krugerrand, are treated as chargeable assets.

That matters more as the allowance shrinks and the pressure on rates grows. A gain on shares or a second property is exposed to whatever the Chancellor decides. The same gain on UK legal tender gold coins sits outside the tax.

Many customers prefer graded coins for the same reason they value the tax position: certainty. A coin sealed by NGC or PCGS carries its own certification number and can be verified online in seconds.

We will cover the Budget in full once the detail is published. Until then, the sensible approach is to understand the rules as they stand.

Speak to a specialist

If you would like to talk it through, call a specialist on 0208 064 0076, Monday to Friday, 9am to 5pm, or book a call at a time that suits you.

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Sources

This article is for information only. The value of gold can go down as well as up.

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Gold Insights are independent articles, researched and written by our own team at Gold Tier Advisory.