Investors concerned about potential capital gains tax (CGT) changes in the upcoming Autumn Budget may want to consider four key areas, according to Gary Smith, senior client partner in financial planning at wealth management firm Evelyn Partners.
CGT is charged on profits made when certain assets are sold outside tax-free wrappers such as ISAs and pensions. The tax has already undergone significant changes in recent years, leaving investors with less room to make tax-free gains. It has been speculated that Labour could increase CGT rates to 20%, 40% and 45%, bringing them into line with income tax, which would drive up bills for millions.
Don't act on speculation
Smith urged investors not to make decisions based on speculation ahead of the Budget. He said: "At this stage, we don't know what measures will be in the forthcoming Budget, and it is important to make financial decisions based on facts, not speculation."
However, he warned that the tax's recent history made planning ahead increasingly important. The annual CGT exemption was cut from £12,300 in the 2022/23 tax year to £3,000, where it stands today. Tax rates were then increased in Labour's autumn 2024 Budget, rising from 10% to 18% for basic rate taxpayers and from 20% to 24% for higher and additional-rate taxpayers.
Smith said: "When the rates of CGT were increased at the 2024 Budget, they went up with immediate effect on the day, because the Treasury is well aware that CGT is in many instances an elective tax, and investors can either bring forward or delay the disposal of assets in order to swerve higher rates of tax."
Shelter investments and use exemptions
One option is to use the current £20,000 annual ISA allowance. Investments held inside an ISA can grow free of tax, and withdrawals are tax-free. Investors can sell investments held outside an ISA and repurchase them within one, a process known as "Bed & ISA". However, the sale may trigger CGT, making it important to consider available exemptions and the timing of the transaction.
Smith said: "This [Bed & ISA] procedure can take some time, anything from a few days to a couple of weeks, depending on the investments held and the efficiency of the platforms used. The key point is the date on which the gain is crystallised: in October 2024, investors who sold the day before the Budget were exposed to a lower rate than those who sold after."
Pensions can also shelter investments from CGT, although access is restricted until the applicable minimum pension age, and only 25% of the pot's value can be withdrawn tax-free, subject to a maximum amount of £268,275. Other options include investment bonds (onshore and offshore), while funds of funds can offer greater control over when gains are realised.
The CGT exemption is a use-it-or-lose-it allowance that cannot be carried forward. Smith said the allowance is often overlooked, even by experienced investors, allowing profits to accumulate and potentially creating larger tax bills when holdings are eventually sold.
Spousal transfers and capital losses
Transfers between spouses and civil partners are generally exempt from CGT on transfer, unlike gifts to other people, which can trigger a disposal for tax purposes. Smith explained: "For instance, if a wife decides to gift an asset to her husband, that transfer would be exempt from CGT. The husband could then decide to subsequently sell that asset in the market."
Investors who have sold assets at a loss may be able to use these losses to reduce taxable gains in the same tax year or in future tax years. Smith said: "You are able to carry [capital losses] forward for an indefinite period of time and use them to reduce the tax that could be payable during periods when you sell assets that have increased in value."
However, Smith noted: "In order to use previous losses, this must be recorded with HMRC, and that means you need to disclose losses on your annual tax return." This is not financial advice. Before making any decisions, consider speaking to a trusted financial advisor.
