Indexation Neutralizes Higher CGT, Volatility Amplifies Distortion
I’ve modelled 3 possible UK CGT systems over 20 years assuming: • £100k invested • 7% annual returns • 3% annual inflation • invested in a collective fund (taxed once to CGT at the end) or a portfolio of individual shares sold every 5 years and taxed after each disposal • No ISAs/pensions used Current System (24% CGT, no indexation) • Fund: £318k final value | 5.96% pa • Shares: £291k final value | 5.48% pa 45% CGT + Inflation Indexation • Fund: £294k final value | 5.55% pa • Shares: £280k final value | 5.28% pa 45% CGT, NO Indexation • Fund: £258k final value | 4.91% pa • Shares: £218k final value | 4.01% pa So based on these assumptions indexation largely offsets the impact of the higher headline rate of CGT. However, in the real world returns are volatile rather than a smooth 7% annually. That likely makes high-rate CGT systems more economically distortive than static models suggest, because tax gets paid after strong years while losses are only relieved later — permanently removing capital from long-term compounding.
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