Investors and pension savers can now plan ahead with more clarity as the dust settles on the autumn Budget.
Weeks of speculation ahead of Labour’s first big set piece caused more uncertainty than the measures unveiled in the Budget itself. In the event, most of the big moves in the Budget had already been flagged up by the government, including changes to capital gains tax (CGT) – but this one will still have a big impact on some investors.
CGT is charged on any gains on the sale of investments not in an ISA (and assets including second homes and personal possessions) above the tax-free limit. Rachel Reeves announced that the main rate of CGT is rising from 10% to 18% for basic rate taxpayers and from 20% to 24% for higher and additional rate taxpayers.
While the change itself was no surprise, the fact that it applies immediately is. It also follows changes that have already made CGT less generous in recent years, with the annual allowance being lowered from £12,300 in the 2022-23 tax year to the present level of just £3,000.
All this means investors could be left with smaller gains from their investments if they don’t take action. Here are five steps you can take to mitigate the latest changes to CGT.
Use your full ISA allowance
It’s now become even more important for investors to maximise their use of tax-free wrappers that offer shelter from CGT. The main options are pensions and Individual Savings Accounts (ISAs), as investments held in these wrappers aren’t subject to CGT.
The annual ISA allowance has now been frozen at £20,000 until 2030, with the limits on Lifetime ISAs and Junior ISAs also being left at £4,000 and £9,000 respectively for that period. Use as much of the £20,000 allowance as you can to protect your savings. If you don’t use it, you lose it, with no option to carry it over to the next tax year.
Go to bed, part 1
One approach to consider is the Bed-and-ISA method. This is a way of transferring assets (such as shares and funds) held outside a tax wrapper into an ISA, to protect future investment growth and income from tax.
First, make sure you’ve got some of your £20,000 ISA allowance left. You will then need to use your investment platform’s Bed-and-ISA service, which will sell the investment outside the ISA and transfer the proceeds into an ISA. They will then be used to immediately buy the same investment within the ISA.
Bed-and-ISA deadlines tend to fall several days before the end of the tax year, so starting sooner rather than later is recommended. You can do the same with a self-invested personal pension (SIPP).
Go to bed, part 2
Another option is to bed-and-spouse. This is where you sell investments that sit outside your ISA and rebuy them in your spouse’s name, as assets can be transferred to a spouse or civil partner free of capital gains tax. This means you can use your annual CGT allowance while your spouse can then move the investments into their ISA, where they are sheltered from future CGT and income tax.
If you’re a higher or additional rate taxpayer and your spouse is a basic rate taxpayer, you could benefit from transferring assets to them even if the gain is above the £3,000 annual allowance. The appeal of this has been reduced by Reeves choosing to close the gap between the CGT rate for basic rate taxpayers and that for higher and additional rate taxpayers, however.
Make your losses work for you
You can also reduce your CGT liability by reporting any losses you incur, as these can
be used to offset any gains you’ve made, reducing the amount of gain you’re charged CGT on. This needs to be done through the self-assessment system. The losses have to be reported to HM Revenue and Customs within four years from the end of the tax year in which they arose.
Also note that investors can’t carry the annual CGT allowance forward to the following year, so make sure you use the full allowance each year if you can.
Explore alternatives
News that Venture Capital Trusts (VCTs) have been extended until 2035 gives wealthier, experienced investors another option. VCT investors can continue to benefit from tax-free dividends from VCT shares and an exemption from capital gains tax (CGT) when they sell them, as well as upfront income tax relief of up to 30%.
While VCTs are very attractive in tax terms, they are also high risk and suitable only for sophisticated investors able to cope with potentially significant capital losses. This is because the companies in which VCTs invest are usually small, unquoted firms with little track record, unproven management, no established market value and which are often illiquid, meaning they are difficult to sell on the secondary market.
