The re-introduction of equity LTCG tax offers not only a chance to clean up our portfolios, but also recognise an important fact: returns from equity may gradually decrease in the next decade or so. No, I am not talking about tax eating away our returns. There are two reasons for this, – one positive and one not so much. We will consider the positive reason in this post.
Yes, the equity LTCG tax (assuming it stays at 10% for a few years) will reduce returns by at least 1% as shown in this study: Equity LTCG Taxation: How much tax do I need to pay? Illustration part 1. So I will now expect 9% from equity (instead of 10%). As explained below, this also means fixed income returns will come down, to about 6-7% after LTCG tax. With that, let us get tax out of the way and consider some history.