Tax wrappers recommended by experts include ISAs, pensions, self-invested personal pensions (SIPPs), venture capital trusts (VCTs) and enterprise investment schemes (EISs).
Various investment methods such as a ‘Bed and spouse’ or a ‘Bed and ISA’ can also help mitigate CGT. Some people can also transfer assets to their spouse.
CGT is a tax on the profit when you sell something (such as shares or property) that’s increased in value. Everyone has a CGT allowance each year, but this has been drastically cut in the past few years from £12,300 to £3,000.
Chancellor Rachel Reeves announced in the Budget that the lower rate of CGT will increase immediately from 10% to 18%, while the higher rate will rise from 20% to 24%.
Laith Khalaf, head of investment analysis at AJ Bell, said: “Higher rates of capital gains tax are an unwelcome addition to the burden currently shouldered by investors, who already face lower tax-free allowances for dividends and capital gains, as well as frozen income tax thresholds, which push them up towards higher tax bands. A rise in the minimum wage and employers’ National Insurance will also reduce the profit margins of many of the businesses they invest in.
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“The tax itself is one thing, but investors facing CGT also face high levels of complexity in calculating their liability if they invest regularly, or if they invest in funds [that] provide return via a combination of income and gains. Plenty of people will find themselves in this situation. Staying out of the CGT net may well be as rewarding in terms of reducing paperwork as it is in keeping more of your gains in your own pocket.”
Pensions and ISAs
Investments held within pensions and ISAs aren’t subject to CGT, nor are the dividends they produce subject to income tax.
A rise in CGT, especially combined with an annual CGT allowance of just £3,000, means investors should prioritise pensions and ISAs if they’re hoping for growth on their investments.
Those who hold ‘unwrapped’ investments can perform a manoeuvre called a ‘Bed and ISA’ or ‘Bed and SIPP’ to move them inside a tax shelter.
Khalaf explained: “This does involve selling assets so there is potentially a CGT liability at this point, though investors can mitigate this by judicious use of their annual £3,000 CGT allowance.
“Once inside the SIPP or ISA, any further gains are then free from tax. Investors who feel they might breach the £3,000 annual CGT allowance using this approach might consider pairing the sale of a profitable investment with a loss-making one. Losses can be used to offset gains, thereby reducing the CGT liability, then either or both investments can be re-bought within the ISA to avoid tax on future gains.”
‘Bed and spouse’
Assets can be transferred to a spouse or civil partner free of CGT, and by doing so, investors can utilise two sets of the annual £3,000 CGT allowance on profitable share sales.
By doing a ‘Bed and spouse and ISA’, it’s also possible to then use two sets of the annual ISA allowance of £20,000 to shelter those assets from future capital gains.
For higher-rate taxpayers, there may also be some merit in transferring assets to a spouse even where the gain exceeds the annual CGT allowance of £3,000, if they are a basic-rate taxpayer.
Khalaf said: “By increasing the rate of CGT for basic-rate taxpayers more than higher-rate taxpayers, the Chancellor has narrowed the value of this ploy.
“But it might still mean paying CGT at 18% rather than 24%. In this scenario, capital gains are added to your income and can push basic-rate taxpayers into the higher band, so it pays to exercise due care and attention when working out how much to transfer.”
VCTs and EISs
In the Budget, the Chancellor confirmed the VCT schemes and EISs will be extended until 2035. The tax perks are very attractive for VCTs and EISs, but they are more risky than mainstream investments.
VCTs and EISs invest in small, early-stage companies that might fail and have low levels of liquidity. Capital gains on investments held within both VCTs and EISs are free from tax, and in addition, an EIS investment provides the opportunity to defer capital gains made elsewhere.
