Making investment decisions based solely on speculation about future tax changes can leave investors paying tax unnecessarily. That's why rumours that the Government is considering raising capital gains tax (CGT) rates at the Autumn Budget, potentially even aligning them with income tax rates, should be approached with care.
As we’ve seen in recent years, Budget speculation does not always match what’s ultimately delivered. Acting on rumours rather than confirmed policy can prove costly, especially if investors crystallise gains above the £3,000 annual CGT exemption and miss out on future growth.
This article isn’t personal advice. If you’re not sure an investment is right for you, seek advice.
Why investors should be cautious about CGT budget speculation
We saw this ahead of the Autumn Budget in 2024, when fears that CGT rates would be aligned with personal income tax rates prompted a modest uplift in the number of HL investors realising gains in their Fund and Share Accounts compared to the summer months before and the winter months after.
Yet the changes proved far less dramatic than expected.
On Budget Day, the then Chancellor, Rachel Reeves increased the basic capital gains tax rate to 18% from 10%, and raised the higher rate to 24% from 20%, with the changes taking effect that day.
While some of the recent Budget speculation centres on CGT rates rising as high as 45% for the highest-rate taxpayers, taxing wealth more heavily overlooks the behavioural impact of such a move. Rather than raising additional tax revenue, significantly higher rates could have the opposite effect if investors simply defer realising gains.
What to consider before the Budget
What we don’t have in the run-up to this Budget is a crystal ball. So, until October 28 we have no idea what the new Chancellor, John Healey, will ultimately unveil.
For investors nervous about the potential for further CGT hikes, there are some sensible steps they can take now. Many are actions that would typically be considered closer to the end of the tax year, so it’s a no regrets move to bring them forward if you were planning to do them anyway.
There are a few important points to consider first.
CGT is only payable when assets are sold and gains exceed the annual exemption. This gives investors a degree of control over when the tax is triggered.
The annual CGT exemption, the point at which you’re liable to pay tax, is currently set at £3,000, less than a quarter of the £12,300 available in the 2022-23 tax year, having been cut to £6,000 in April 2023 before being halved again in April 2024.
Selling assets and crystallising gains above the allowance means paying tax earlier than necessary and potentially sacrificing future investment growth.
Tax-efficient strategies to manage CGT now
So, what can you do now?
Rather than reacting to speculation, you should focus on long-term planning and making full use of tax-efficient wrappers like Stocks and Shares ISAs and pensions, where future capital gains are sheltered from tax. Although, tax benefits do depend on circumstances.
Investors with spare ISA and pension allowances can take advantage of Share Exchange, sometimes known as Bed and ISA or Bed and SIPP, to move assets into a tax shelter, taking care not to exceed the £3,000 annual CGT exemption when selling. There are also a couple of other considerations to look at before going ahead.
For those with larger portfolios held outside tax wrappers, it can make sense, where appropriate, to use the £3,000 annual exemption each year to realise gains gradually rather than building up a much larger tax liability further down the line. Regularly banking smaller gains can reset the cost base of your investments and help reduce the eventual CGT bill when the assets are sold.
Married couples and civil partners also have additional flexibility because they can take advantage of interspousal transfers to move assets between them, without triggering a tax event. They can then maximise two sets of tax-free allowances, including two annual CGT exemptions. Where one partner pays a lower rate of income tax, this can help reduce the rate of CGT payable on gains above the annual exemption.
Filter out the noise
In the run up to Andy Burnham’s first budget, speculation is going to be running rife and you will need an opinion you can trust. HL are only covering the rumours and announcements worth your time, not the ones that are pure speculation.
No rushed takes, just balanced commentary from our in-house team of experts.
Sign up to our weekly Editor's Choice email to make sure you don't miss out on the key changes from the Autumn Budget.