Jeremy Hunt’s grim Autumn Statement to Parliament on 17 November sought to address a £54bn black hole in Britain’s public finances by introducing £24bn in tax hikes and £30bn in spending cuts.
The chancellor’s measures were necessitated by the disaster of his predecessor Kwasi Kwarteng’s “mini-Budget” of 23 September, a radical but uncosted tax-slashing agenda reliant on heavy government borrowing that promised to deliver “growth, growth, growth” but instead spooked the international markets, tanked the pound, sparked chaos in the mortgage sector, forced a dramatic intervention from the Bank of England to prop up pensions and brought a swift end to the premiership of Liz Truss.
Addressing the House of Commons, Mr Hunt admitted that the UK is now in recession before unveiling a slew of announcements that leave the British public facing a dramatic slide in living standards with inflation at a 41-year-high of 11.1 per cent and saddled with the biggest tax burden since the aftermath of the Second World War.
His decisions on tax and wages included freezing the income tax personal allowance and higher rate thresholds for a further two years to April 2028 in what has been described as a “stealth raid” on people’s earnings that could end up hauling thousands into higher tax brackets as a result of “fiscal drag” and increases in salaries.
Mr Hunt also said that the tax-free allowance for capital gains tax (CGT) – paid when an asset is sold or gifted – would be reduced from £12,300 to £6,000 within six months and further cut to £3,000 from April 2024, while the allowance on dividends will fall from £2,000 to £1,000 in the new tax year and then halve again to £500 the year after.
While CGT does not affect taxpayers’ primary assets like their main residence or car, the move will have a bearing on other key holdings like second homes, investments and other valuable but non-essential assets such as antiques or vintage wines.
This has reportedly left thousands of investors, pensioners and buy-to-let landlords racing to consult with financial advisers before Mr Hunt’s allowance-halving policy comes into effect in April 2023.
Speaking to The Daily Telegraph, financial adviser Felix Milton said his clients had begun calling within hours of Mr Hunt’s speech concluding.
“They are panicked – they now suddenly have under six months until April before new tax rules come into force,” he said.
“Many retired people have built portfolios designed to pay dividends to help them with their income. Now the allowance will be shrinking to as little as £500, that strategy has gone out the window.
“One of my clients has three buy-to-let properties but they want to start selling them because they do not want to get hammered by capital gains tax.”
Chris Springett, tax partner at wealth management and professional services firm Evelyn Partners, said Mr Hunt’s move on CGT was “not surprising” given that the tax had only narrowly emerged unscathed from then-chancellor Rishi Sunak’s Spring Budget of 2021.
“Most CGT comes from a small number of taxpayers who make large gains,” he said.
“The halving of the allowance increases the burden on investors and property owners at the other end of the CGT spectrum – those who have made relatively modest gains but are nevertheless drawn across a much-reduced threshold. Moreover, these taxpayers may need to file tax returns for the first time to report capital gains, causing a new admin headache.
“Also, capital gains can be deferred: as owners of assets can put off a sale in order to stave off a CGT liability, so the cut in the CGT exemption might raise less than Mr Hunt is hoping.
“What this does for all taxpayers, is make the case for holding investments in wrappers that afford tax protection even more compelling than it is already. Investments held in ISAs and pensions are exempt from CGT, which is why many investors never encounter the tax.”
For second homeowners and landlords though, the CGT changes mean a higher tax bill for the profits they have yielded as a result of climbing house prices, a further blow to the attractions of property acquisition as an investment strategy.
While the new rules might leave some inclined to sell up as quickly as possible, doing so is likely to prove difficult at present because of the highly adverse market conditions in play and the imminent disruption caused to the real estate sector by the arrival of Christmas.
Others might be considering incorporating into limited companies to run their properties, meaning they would pay corporation tax on their sales instead, which is more favourable, although doing so could mean paying both stamp duty and CGT at the outset, a hit they may be prepared to take in order to save themselves even larger tax bills in future.
Ultimately, Mr Springett said, the Autumn Statement had provided a reminder to us all “of the sense in using allowances effectively”.
