Sunday, May 30, 2010

CGT is NOT double taxation. It's just misunderstood.

Let's just clear up a key misconception about CGT. Some people argue that it amounts to double taxation. "I've paid tax on my earnings, it's double tax if I have to pay CGT when I invest my savings."

Er, no. That's not how it works. You only pay Capital GAINS Tax on GAINS you make. That is, on increases in the value of your investments - and only when you realise those gains by disposing of your investments. There's no double taxation involved.

If you earn £1,000 and have £600 left after (top rate) tax you can either spend the £600, save it or invest it. If you save it in a bank account you will receive interest and pay tax on the interest. Your £600 is unaffected by this.

If you invest the £600 in shares, for example, these will increase or fall in value. If you have invested in a second property, this will, hopefully increase in value. Again it's only when you realise that increased value that CGT becomes payable and only by reference to the increase.

Let's go back to the example of the shares acquired for £600. If, when you sell the shares in the future, they are worth, say £800, you will have made a capital gain of £200 (£800-£600). CGT is only payable by reference to that gain of £200 (hence Capital GAINS Tax). Again, the £600 you earned, after tax, is unaffected.

So, tell me, how does this constitute double taxation?


  1. Inheritance tax, on the other hand, could be argued to be double taxation. - On the part that represents earnings which have been subject to income tax. A lack of planning can also lead to double taxation of CGT and IHT on the same asset, where the asset is given away within 7 years of death or the use of the asset is retained until death.

  2. I think the feeling comes from a lack of symmetry with other types of investment, such as pensions or ISAs.

    You'll know this, Mark, but for the uninitiated, pensions are a 'EET' investment - you contribute from untaxed earnings, income and gains on those investments roll up tax-free, and you pay tax on any income withdrawn. Conversely, ISAs are 'TEE' - you contribute from taxed earnings, but income/gains roll up tax-free and you don't pay any more tax on any income withdrawn.

    Compare that to the share investment example you give. It's 'TTT' - taxed on the way in, taxed while it's in there, and taxed on the way out. And, let's not forget, dividends are paid out of the company's post-tax income, so there's even more tax in there.

    As if that wasn't bad enough, as I've pointed out on my blog, now we've done away with indexation and taper relief, you now risk in effect being taxed on gains you haven't made thanks to the ravages of inflation.