Savers could suffer from the Government’s planned Capital Gains Tax rise if the tax-free allowance is slashed too, says Fidelity International.

Fidelity is urging the Government to leave the tax-free allowance at £10,100 when it increases CGT in its emergency Budget on 22 June. There are fears that a reduction in this allowance will harm existing savers with modest savings pots which are earning from long-term gains and that it could scare people from saving more for their future.

The new coalition has announced plans to raise the CGT level to around 40 per cent from the current rate of 18 per cent.

So far they have remained silent about whether the tax free allowance will change but the Liberal Democrats have previously proposed reducing it to just £2,000 which would significantly increase the number of people liable for the tax.

According to Fidelity’s analysis its average direct and advised clients in the UK have managed to save up a pot of around £18,000 in investments outside tax-free wrappers and it is these savers who would be hardest hit if the tax free allowance is reduced.

Paul Kennedy, head of tax planning at Fidelity, says: “The upcoming increases in the rate of CGT have been subject of much attention in relation to wealthy individuals. However, it should be remembered that the allowance is relevant to all investors, not just those on higher incomes.

 “Such a change is likely to damage particularly older people who have saved prudently to supplement their income in retirement and gradually sell down their holdings.”

He advises that the only way to avoid paying unexpected CGT in this situation would be by switching investment from one fund to another as soon as the gain approaches £2,000.

He added: “The Lib Dems may consider £2,000 to be a reasonable allowance but you only get one allowance when cashing-in after years of investing and if you’ve been saving for 15 years, it would only amount to just over £100 per year. If it does drop, then at the very least, you ought to be able to carry your used annual allowances forward for the time when you need to draw your savings.”

Experts are also warning that the rise will slow down a recovery in the housing market. The buy-to-let market is expected to suffer the most as investors rush to sell off property investments.

A campaign from The Telegraph is urging the Government to guarantee  the tax-free allowance to protect small investors and second home owners from the full increase in CGT, which is being described as David Cameron’s first big test as Prime Minister.

© Fair Investment Company Ltd