Beat CGT rises with these 7 top tips
Beat CGT rises with these 7 top tips
‘Not great but it could’ve been worse’, seemed the cry from investors following Chancellor Rachel Reeve’s first Labour budget in nearly 15 years. In the run up, speculation surrounding changes to taxation had been rife, with some commentators suggesting rises in capital gains tax (CGT) that could top out at 39%. Alas, when the Chancellor finally stepped up to the dispatch box on October 30th and announced that CGT would indeed rise, but to 18% for lower rate taxpayers and 24% for higher rate, effective immediately, there was almost a sigh of relief.
None-the-less, retail investors haven’t had it easy in recent years, with the tax free allowance for CGT alone dropping precipitously from £12,300 to £3,000 per year. What’s more, investors might’ve been hoping that potential tax changes would come after tax year end, offering some wiggle-room to crystallise unwrapped capital gains under the lower rate of the old regime.
Naturally, as is often the case with changes to our tax system, it leaves financial planning questions on the table. Here, we offer seven tips for beating those CGT rises. Please remember though, we don’t know your personal financial circumstances and the following shouldn’t be construed as tax advice.
1. Pensions and ISAs for tax efficient investing
Bar the tax treatment of pensions upon death, the UK’s two main investing tax wrappers have retained other key tax benefits. It means investing through an ISA or pension continues to be completely free of investing taxes including CGT, likely keeping them as an attractive method of transport for investors looking to put their money to work in the stock markets.
2. The £3,000 tax free allowance can be used strategically
Each year, an individual can realise up to £3,000 of gains on the sale of assets outside of tax wrappers without having to pay CGT. This is a use-it or lose-it allowance, so unused allowances can’t be carried forward into future years.
For those with unwrapped investments, they could consider ‘Bed and ISA’ or ‘Bed and SIPP’ strategies - processes that involve shifting assets inside tax wrappers and biting the bullet on any current tax liabilities to avoid larger ones in the future.
Another strategy is ‘Bed and Spouse’ whereby assets are transferred to a spouse, deferring any gains until disposal and effectively doubling an individual’s £3,000 annual tax free allowance.
3. Losses can be paired to offset gains
While losses are always painful in investing, they can be useful for lowering CGT bills as they offset gains. Importantly, losses can also be carried forward indefinitely for offsetting potential future gains. To do this, the loss just needs to be registered with HMRC within four years from the end of the tax year in which the loss was crystallised.
4. Pension contributions can drop you down a tax band
One crafty little strategy is using pension contributions to lower taxable earnings and therefore potential income tax bandings. If a contribution drops an individual into the basic rate tax band, then it could lower the rate of CGT they pay on any gains crystallised too.
5. One-stop global equity shops reduce the need for frequent trading
Keen investors are likely to hold all sorts of funds that invest in markets around the world, which means differing stock market performance is likely to alter the percentage of assets invested across them. As a result, portfolios may need rebalancing from time to time to bring everything back on an even keel, which can trigger tax liabilities for unwrapped investments.
When funds and investment trusts rebalance, however, they are exempt from CGT. As such, investing in a one-stop shop global equity portfolio such as Alliance Witan, which employs 11 stock pickers to find attractive investment opportunities wherever they arise in markets around the world, does away with the need to hold lots of funds and investment trusts and can serve to keep an individual’s portfolio trading and tax liabilities to a minimum.
6. Venture capital trusts (VCTs), enterprise investment schemes (EIS) and seed enterprise investment schemes (SEIS) manoeuvre around capital gains
The Chancellor has extended the VCT and EIS schemes until 2035, which are used for investing in smaller, riskier, high growth firms. What’s particularly attractive about these schemes are the tax perks. These include benefits such as up to 30% income tax relief and CGT relief, as well as deferrals of capital gains generated from investments made elsewhere if proceeds are invested in EIS schemes and kept there.
But as the head of investment analysis at AJ Bell, Laith Khalaf, remarks, “investors should ensure they don’t let the tax tail wag the investment dog”, noting that they are complex and perhaps for the more “adventurous and wealthy investor”.
7. UK government gilts avoid CGT
UK government bonds, known as gilts, can be useful for financial planning because of a little tax quirk: while interest is taxed, capital growth isn’t. In recent years, this has made particularly low-yielding short-dated gilts popular for those seeking cash proxies to avoid paying tax on interest from higher yielding cash reserves.
Still a fortunate bunch
Whether the Chancellor’s changes to CGT will affect stock market investing in the UK more broadly is open to debate. Some commentators worry it may slow the movement of capital through the economy as investors try to avoid crystallising gains. Others think it will do a disservice to efforts attempting to get Brits using more of their savings for investments in longer term growth assets such as shares.
For most investors though, they’ll find the generosity of contribution limits and tax benefits of ISAs and pensions extraordinary, offering them ample opportunity to put their hard-earned cash to work in the stock markets and build wealth over the long term.
This information is for informational purposes only and should not be considered investment advice. Past performance is not a reliable indicator of future returns. The views expressed are the opinion of Towers Watson Investment Management (TWIM), the authorised Alternative Investment Fund Manager of Alliance Witan PLC, and are not intended as a forecast, a guarantee of future results, investment recommendations or an offer to buy or sell any securities. The views expressed were current as at November 2024 and are subject to change. Past performance is not indicative of future results. A company’s fundamentals or earnings growth is no guarantee that its share price will increase. You should not assume that any investment is or will be profitable. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.
TWIM is authorised and regulated by the Financial Conduct Authority. Alliance Witan PLC is listed on the London Stock Exchange and is registered in Scotland No SC1731. Registered office: River Court, 5 West Victoria Dock Road, Dundee DD1 3JT. Alliance Witan PLC is not authorised and regulated by the Financial Conduct Authority and gives no financial or investment advice.