Before I’m slaughtered by the social (in)justice shut-up-and-count-your-blessings-you-privileged-dickwad crowd, let me make one point: I don’t think all taxes are evil.
There is however one tax that I truly hate: the Capital Gains Tax.
Unearned income? I beg to differ. In my case at least it is very much earned. First I earned my salary, which was heavily taxed. Then, instead of blowing what The Taxman allowed me to keep on booze, horses and landfill fodder, I invested some of the money in various ventures where my capital was at risk.
It could have gone either way, but luckily for me the punt paid off, and — lo and behold — here I am keying my debit card details into the HMRC portal. And isn’t it ironic that, had I bet the same money on the winning horse at the races, my winnings would’ve been tax free?
That Monevator dude has written many articles on the Why and the How of the CGT management, so I’m not going to repeat it all here, but I shall attempt to provide an illustration of why a buy-and-hold strategy in taxable accounts is not the way to go, even if you are more favourably disposed to the CGT than I am.
Also, to my fellow landlords with rental properties I can say this — tough shit. You’ll just have to pay tax on inflation when you finally sell the property.
Example
Commodities and non-dividend paying stocks are the easiest investments to use as examples when discussing the CGT; I’ll use an investment in gold (Au) in mine.
Had you invested £20,000 in the shiny-shiny in 1988 and kept your investment in a taxable account for 34 years, by the end of 2021 you would have made a gain of £96k. Fantastic! …Or is it? On closer inspection not all of the £96k is a real gain. Because: depending on which inflation index you use, between £25k and £37k of it is inflation. Also, as a higher rate tax payer, you have an uncrystallised CGT liability of £17k. This leaves you with a real after tax profit of £43k to £55k, again, depending on which measure of inflation you use.
| CPI | RPI | |
| Initial investment in 1988 | 20,000 | 20,000 |
| Inflation | 25,000 | 37,063 |
| Capital Gains Tax | 16,825 | 16,825 |
| Real gain / (loss) net of tax | 54,600 | 42,537 |
| Nominal value of the holding 2021 | 116,425 | 116,425 |
Here’s a nice graph to illustrate. Because: I’m a nerd and I like graphs.
But wait, what if, instead of holding your investment for 34 years, you had held it for only 20 years, say, till the end of 2007? The picture would be quite different: you would have made a loss in real terms, and you’d still have to pay the CGT on it.
| CPI | RPI | |
| Initial investment in 1988 | 20,000 | 20,000 |
| Inflation | 12,984 | 18,653 |
| Capital Gains Tax | 2,303 | 2,303 |
| Real gain / (loss) net of tax | (330) | (5,999) |
| Nominal value of the holding 2007 | 34,957 | 34,957 |
It gets worse as the initial investment amount and the inflation rate increase. With significant unsheltered investments in a high inflationary environment you don’t even need to hold your assets that long before you start paying tax on inflation.
Why is this relevant?
Inflation is coming has come.
Stealth taxes are currently fashionable, and the Conservative governments of the recent past, including the assholes we happen to be saddled with currently, have near perfected the art of increasing the tax take by deliberately failing to index tax exempt thresholds and allowances in line with inflation.
Moral of the story
I think there are two outtakes here.
First of all, the CGT is a tax on capital gains as well as inflation, and if you don’t want to pay tax on the inflationary growth that adds no real value to your war chest, you must take early and consistent steps to defuse the CGT liability.
Second (of all), for some folks with significant BTL portfolios — the Rental Property Is My Pension crowd — this will end in tears one day. BTL became very profitable and popular in a low interest rate, low inflation environment. If the inflation stays high, it’ll rout the capital gains element of the BTL return, in addition to what high non-tax-deductible mortgage interest will do to the net rental income.
3652 Days 