Quilter Financial Planning expert Rachael Griffin has warned that a rumoured near doubling of the Capital Gains Tax to 39% in the Budget could alter investor behaviour. 

She believes many investors could choose to hang on to investments rather than selling them and incurring a big tax bill.

According to a report in the Guardian yesterday, Chancellor Rachel Reeves is considering increasing CGT, usually charged at a flat rate of 20%, to between 33% and 39%.

The Guardian says Ms Reeves may be forced to implement the big increase to plug a gaping hole in government finances.

The Guardian reports that the wealth tax is paid by about 350,000 people. It is typically charged on the sale of assets including second homes and shares.

The Guardian reports that its Whitehall sources say there is growing concern about the limited options for tax rises to fill a hole that the Institute for Fiscal Studies (IFS) thinktank says is as big as £25bn, ahead of the budget on 30 October.

Rachael Griffin, tax and Financial Planning expert at Quilter, warns that while the move may be under consideration it could fail to raise significant sums and could encourage investors to keep hold of investments for longer to avoid the tax, which is only charged when a taxable gain is made.

She said: “It is well understood that capital gains tax is in the crosshairs ahead of the Labour’s first budget later this month, and an increase no longer seems to be an ‘if’, but a ‘when’ and ‘how much by’.

"Reports that Chancellor Rachael Reeves is considering hiking capital gains tax rates to between 33%-39% are not all that surprising given an alignment to income tax rates had previously been tabled, but questions remain whether such a drastic hike would achieve much in the way of filling the Chancellor’s ‘black hole’.

“A full-scale reform of CGT has perhaps been deemed too lengthy a process for the Chancellor to take on, so hiking rates may be viewed as a stop gap in the hopes of boosting coffers in the nearer term. However, the real question will be whether it will raise more tax - which is only likely to be in the hundreds of millions at best - or whether it would simply make people change their behaviours.

"Unless there is a delay before implementation, increasing CGT rates would likely only incentivise people to hold assets for the long term rather than result in a quick and immediate increase in revenue.”

She pointed out at this stage nothing has been confirmed for Labour’s first Budget which takes place on 30 Oct. Reports have circulated of tax rises and suggestions of some kind of tax raid on pensions although pre-Budget rumours are often circulated and many are proved to be incorrect when the Budget has been delivered. Ms Reeves has said however that she needs to fill a major gap in government finances.