- Consider taking gains this year before the capital gains tax allowance is slashed
- Make the most of your Isa allowance
- You can also transfer assets to your spouse and look at investments offering tax incentives
Starting from the next tax year, investors are in for a pretty sizable increase to capital gains tax (CGT). In last week’s Autumn Statement, amid a flurry of tax hikes, chancellor Jeremy Hunt announced that the CGT allowance will be reduced from the current £12,300 to £6,000 from April 2023, then cut again to £3,000 from April 2024. A higher or additional-rate taxpayer that makes a £12,000 taxable gain will owe no CGT this year, but will have to pay £1,200 in 2023-24 and £1,800 from April 2024.
CGT rates will remain unchanged. For assets other than residential property, higher and additional-rate taxpayers pay 20 per cent on taxable gains, while basic taxpayers pay 10 per cent as long as the sum of the capital gains outside the allowance and their taxable income stays within the basic income tax band (they are taxed 20 per cent on anything over that).
Ahead of the April deadline, you should review your arrangements and make sure you are holding and managing your investment in the most possible tax-efficient way. We will be looking at the impact of CGT on residential property in a separate article.
Make the most of your Isa
The first obvious thing to think about is whether you are making the most of your individual savings account (Isa) allowance. Given that gains made within an Isa are tax-free – and Isa investments are not subject to dividend tax either, which will also increase from next year – this one is a no-brainer.
“Shifting investments into an Isa, with a generous annual allowance of £20,000, protects future dividends and gains from the clutches of HMRC. It also means that you will no longer have to declare them on your self-assessment tax return – so less hassle,” says Myron Jobson, senior personal finance analyst at Interactive Investor.
If you own investments outside an Isa and have not used all of your allowance, you can consider a so-called bed-and-Isa, which entails selling your non-Isa investments and buying them back within an Isa. You can also do the same with a self-invested personal pension (Sipp) – despite the rumours that circulated ahead of the Autumn Statement, Hunt has left the higher-rate pension tax relief untouched, and pensions remain a highly tax-efficient way to invest.
Before proceeding with a bed-and-Isa transaction, there are a few things to think about. Firstly, these transactions are not exempt from CGT – you will still have to pay it if you generate gains above the allowance. But since the allowance will be reduced from next year, acting now is a way to protect future gains and minimise the bill. With markets in many cases still lower than last year, the timing might prove reasonable, before a recovery boosts your gains (and your taxes as a result).
Secondly, depending on how the transaction is carried out there is likely to be a difference between the price at which you sell your investments and the price at which you buy them back. This is something to be especially mindful of if your platform does not offer a bed-and-Isa service and you have to do it manually – try to calculate how long it will take for the platform to carry out the sale of the assets and later transfer the cash to your Isa. The process might take a few days, during which time markets might move for or against you.
AJ Bell, Interactive Investor and Barclays Smart Investor all offer an automated bed-and-Isa service – you select which investments you want to transfer, up to your remaining Isa allowance, and the platform takes care of the rest. This saves you hassle and can help reduce the difference between buy and sell prices. AJ Bell, for example, says that “the two transactions are carried out together so there is less exposure to market movement”.
Finally, there might be some costs associated with the transaction – typically dealing charges and stamp duty if applicable.
Losses and family allowances
If you do need to hold investments outside an Isa, don't forget to report any losses as well as your gains. “By offsetting your capital losses against your gains you can reduce the amount of gain that is subject to tax,” says Rachael Griffin, tax and financial planning expert at Quilter. “Unused losses from previous years can also be brought forward, provided they are reported to HMRC within four years from the end of the tax year in which the asset was disposed of.”
Another thing to consider is whether you need to hold all your investments yourself. If you are married or in a civil partnership, you can think about an interspousal transfer.
“Transfers between married couples and civil partners do not trigger a taxable event,” explains Alice Haine, personal finance analyst at Evelyn Partners. This means that you have two sets of CGT, Isa and dividend tax allowances at your disposal to try to minimise the overall bill.
“Even where the gain will exceed both sets of exemptions, shifting investments to whichever spouse might be subject to a lower tax band can help reduce the overall liability,” Haine adds. Keep in mind that if you do transfer the assets, your spouse becomes the full legal owner.
While giving away assets to charity is also exempt from CGT, gifting them to somebody else (including your children or an unmarried partner) is not. However, it might still be an option, especially if it is a possibility at some point in the future – better to get it done before the allowance starts shrinking.
Finally, if you have already used all your capital gains allowance but expect your income to decrease (for example due to retirement), and your tax bracket to change, you can think about taking the gains later. As mentioned, basic-rate taxpayers also pay a lower rate of CGT.
Investments with tax incentives
Once all the available tax wrappers are exhausted, you can look at investments that offer some kind of tax advantage.
For a relatively low-risk option, Quilter’s Rachael Griffin suggests investment bonds, which are subject to income tax but allow you to access 5 per cent of your initial premium annually, on a tax-deferred basis, for up to 20 years. The tax-deferred allowance only gets added back when the bond is cashed in or matures, in order to work out the total gain. Again, this can be helpful if you expect to fall into a lower tax band in the future, for example when you retire.
Riskier options include venture capital trusts (VCTs) and Enterprise Investment Scheme (EIS) companies. Both offer 30 per cent income tax relief. VCTs come with tax-free dividends and no CGT, while EIS gains can be realised over a number of tax years, using various annual exemptions; alternatively, the gain can be rolled into a new EIS when the shares are sold.
“Remember, because you are investing in small, early-stage companies, they also come with added risk, particularly when you consider the UK is going into a long, drawn-out recession, which is why VCTs are generally suited to wealthier or more experienced investors with a long-term approach,” says Haine.
