Capital Gains tax is one of a number of areas that David Cameron and Nick Clegg have proposed to overhaul in an effort to raise more revenue.

Capital Gains Tax, or CGT,is paid to the government when an asset, such as land, part of a business, or property, is sold for more than the price originally paid.

At the moment the CGT rate is 18 per cent but if the new coalition’s plans are put into place it could rise to as much as 40 per cent, although it apply to non-business assets only such as shares (held outside ISAs or pension plans), second homes, works of art and even jewellery.

But there are concerns that instead of helping to raise money to reduce the deficit a substantial CGT hike will have an adverse affect on the economy.

Many in the City fear it could push investors offshore to tax havens such as Switzerland, the Channel Islands and the Isle of Man. The potential rise has also prompted anger from property investors and shareholders shares.

Property experts have also warned that a huge rise will encourage property investors and people with second homes to make quick sell-offs, which could push house prices down.

The Association of residential letting Agents has also warned that it could result in a shortage of rental properties as investors sell up.

Fidelity International has urged the new government to consider introducing an inflation-based indexation allowance saying it would be unfair to rise in line with income tax because it would be ‘based on a misleading nominal gain rather than on a real inflation-adjusted profit’.

According to their research if an individual invests £100,000 in a second property in 1985 and 25 years later decides to sell to help fund their retirement. The value of the property would be £490,617 in 2010.

Capital Gains Tax at the current 18 per cent would cost the investor £68,493. But a rise to 40 per cent would see them paying £152,207. However, if this was indexed against inflation it would be reduced to £96,258.

Commenting, Gary Shaughnessy of Fidelity International, said: “If the coalition government goes back to a marginal income tax rate without reintroducing the indexation allowance, this could act as a significant disincentive to future investment in this country.

“If the new government is going to increase CGT it is only fair that they reintroduce indexation so that they are not taxing any illusory gains.”

© Fair Investment Company Ltd