Tuesday, 21 April 2009

A new stealth tax?

While everyone is making their predictions for tomorrow's budget, here's something I wonder if we might see: the introduction of a tax on capital gains within mutual funds. Currently unit trusts and OEICs pay no tax on capital gains on the holdings within the funds themselves (although of course the returns to investors are taxable 'externally') - finance portal Invidion has more on the internal tax treatment of investment products.

If the market goes up 10% — a fair assumption in the next year or two — and the roughly £350bn of UK domiciled mutual funds (source: IMA) pay a 10% tax on the capital gain, the Exchequer gets £3.5bn. On the back of my envelope, this is of a similar order to putting a penny on the basic rate of income tax.

The attraction of this for the Chancellor is that the tabloids won't notice, or much care. Asset managers and pension funds will point out the ill effect on the savings rate and private sector pension values, but if Mr Darling can spin it as 'squeezing the bankers' then that could even make it popular. Of course ultimately it will be savers, investors and future pensioners who will pay, but that hasn't stopped the Government in the past. And the argument will run that they're not losing out, they're just sharing some of their 'unearned' gains.

Is it too much to hope that this budget will do something to encourage people to save for their own future?

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