Written by Steve Martin
Senior Client Services Manager
Ward Goodman
August 13, 2024
Investors are waiting with bated breath for the anticipated changes to Capital Gains Tax (CGT) and the implications for the forthcoming tax year and beyond. Whilst speaking with Bloomberg TV, the new Chancellor of the Exchequer, Rachel Reeves, expressed wanting to “strike the right balance” in taxation in the upcoming autumn budget, leaving advisors and taxpayers expecting sweeping reforms, especially to CGT.
Chancellor Reeve has also given warnings of tax rises needed as a means to cover the £22 billion fiscal deficit in the UK, giving substance to the rumours that CGT rate will be aligning with Income Tax. Such changes to the autumn budget will likely give the UK the highest top rate on capital gains in Europe, changing the fiscal playground for both investors and landlords, causing major concerns from both groups.
Currently, the UK’s CGT rates are moderate in comparison to other countries in Europe, sitting relatively in the middle. However if the CGT rates align with income tax, this would soon change, with a substantial increase coming in the tax burden on gains, particularly for higher-rate taxpayers. This change would double the liability of CGT for most investors.
Historically, there have been many fluctuations and reforms to CGT in the UK in order to ease the burden on long-term investors. Our closest significant changes to today was in 2016. Changes were made for CGT to reflect the current rates and simplify the system within the UK. If the anticipated reform of bringing CGT in line with Income Tax is realised this would create the most burdensome environment seen by investors since the early 1980s!
While waiting for solid confirmation on these changes to CGT, there are a few things investors should do in anticipation of a change. The key is to manage your tax liabilities proactively while you have the time before the upcoming Autumn budget on 30th October.
- Maximise your ISAs and SIPPs: Your best defence against higher CGT rates are tax efficient wrappers – ISAs (Individual Savings Accounts) and SIPPs (Self-Invested Personal Pensions). Make sure to fully utilise your annual allowances in order to shield your gains as much as possible from taxation.
- Utilise the Annual Exemption: Although the Annual Exemption is now significantly reduced to a meagre £3,000 for 2024/25, it is a valuable tool. Consider using financial strategies including Bed and ISA to move your gains into a tax-free ISA.
- Consider Spousal Transfers: When transferring your capital assets to a spouse or civil partner, your overall tax burden can be reduced, especially if your partner is in a lower tax bracket.
- Strategic Pension Contributions: Use your pension contributions wisely as they can help lower your Income Tax exposure and reduce CGT liabilities.
- Offset losses: Use any current or previous losses to offset gains and reduce CGT liability.
To conclude, while this potentially nerve wracking news from Chancellor Reeves has investors unsettled, there are still steps you can take and strategies to use to lessen the impact of rising CGT rates. It is crucial no more than ever to stay on top of your tax affairs and consult your financial advisor to ensure your investments remain tax-efficient this upcoming financial year.
