Changes to capital gain tax had been widely expected in today’s Budget announcement, with even the new headline rates well trailed in the media. Still, the reality of this increase was still sobering for those in the saving and investing industry.
The chancellor confirmed an increase in the rate paid by basic-rate taxpayers from 10% to 18% and from 20% to 24% from today, rather in the next financial year. These rates bring CGT in line with the tax paid for on residential property, whose rates remain the same. The current annual allowance remains the same at £3,000 per person, per tax year.
How Does the Change Impact Investors?
UK adults have an annual ISA allowance of £20,000, an allowance which was left unchanged today. Stocks and savings within this tax wrapper are free of both income and capital gains tax. So even if your investment in that hot tech stock goes up 500%, the government has no claim on your “capital gain”. Many people fail to fill up their annual ISA allowance. But for those whose investments breach this limit, they will have to pay tax on the gain at their marginal tax rate.
What is Capital Gains Tax?
CGT is owed when an individual sells an asset, such as a second home or shares in a company, and where that sale results in a profit or “gain.” You pay tax on the difference between what you paid for an asset and what you sell it for — minus “allowable expenses”.
What Are the Current Allowances and Rates?
There were no changes to the annual allowance of £3,000 — down from £12,300 in 2020 — so there’s not a huge amount to play with before CGT becomes liable. You then pay the tax on any profits above that amount in that tax year. The allowance resets annually on April 6 when the new tax year begins.
Could the Changes to CGT Have Been Worse?
Yes, there were rumors that the chancellor was planning an even bigger hike in CGT, to 40%. This would have aligned capital gains tax rates with the higher-rate income tax band, which is 40%.
This still leaves some room for arbitrage between income and capital gains tax rates.
Still, this Budget could have been more draconian, one fund manager argues.
“The increase in capital gains and inheritance taxes came across as measured and showed that the Chancellor had listened to a number of stakeholders,” says Emma Mogford, fund manager, Premier Miton Monthly Income Fund.
How Much Does CGT Raise?
In the last tax year for which figures are available, 2022-2023, HM Revenue & Customs raised more than £14 billion from 360,000 people. That’s up from £8.2 billion of CGT on £56 billion of gains in the 2018/19 tax year.
“Fiscal drag”, where frozen allowances bring more people into a tax net, plus rising asset prices – UK markets are near record highs – means the reality of CGT may come home to more people in the coming years.
Sarah Coles, head of personal finance, Hargreaves Lansdown, describes the change as a “bitter blow for investors”.
She continues:
“Talking about things like capital gains tax as ‘wealth taxes’ obscures the fact that many people on average incomes, who’ve invested carefully throughout their lives, can face a tax bill when they rebalance their portfolio or sell up to cover their costs later in life. The annual allowance of £3,000 doesn’t stretch particularly far when you’re selling an investment you’ve held for 30 years or more, so investors should consider how to protect themselves.”
How Can I Avoid Paying CGT?
Apart from ISA allowances, pensions are free of CGT, although there have been changes to the inheritance tax treatment of pensions in this Budget.
Investments held within an ISA, some venture capital trusts, shares held in Enterprise Investment Schemes (EIS) and Seed Enterprise Investment Schemes (SEIS), government bonds (gilts) and some corporate bonds are all exempt from CGT — at the moment.
Private cars and wine that can be stored for 50 years are also exempt, which explains the buoyant market in classic cars and posh plonk. But advisers warn that some of these exemptions could be removed in the future.
Are Any Other Sectors Affected by CGT?
The “carried interest” earned by private equity partners has long been in scope for government. Today, the Budget put a 32% capital gains tax rate on this from April 2025. Separately, the government also confirmed that “non-dom” tax status would be abolished, and from 2025 the idea of “tax domicile” will be replaced.
I’m Confused by CGT, What Should I Do?
One aspect of CGT that advisers point to is that, unlike IHT, stamp duty or income tax, it’s a “voluntary” levy. Asset-rich individuals with capital gains can avoid selling assets to avoid triggering a big tax bill. That is likely to increase as a practice if the rules change. There was some anecdotal talk among estate agents ahead of the Budget of buy-to-let landlords offloading properties ahead of Oct.30.
But the rules on allowances and exemptions are complicated, so a financial advisor or accountant may help to shed light on your financial position.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
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