Speculation is growing that capital gains tax (CGT) could make an appearance in the Budget, with investors potentially facing higher rates or a shrunken tax-free allowance.
The Labour government has not ruled out making changes to the tax since getting into power on 5 July.
CGT is paid by investors, business owners, and property owners who make a profit when selling a buy-to-let or holiday home.
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The Labour manifesto promised there would be no increases to income tax, National Insurance, VAT and corporation tax. But it didn't make any promises about CGT.
In contrast, the Conservatives ruled out changing CGT if it won the election.
Chancellor Rachel Reeves will deliver her first Budget on 30 October.
Stephanie Court at the accountancy firm RSM, comments: “Many believe that under the new Labour government CGT rate increases are a question of when, not if, as a result of a need to raise tax revenues if economic growth is not delivered quickly enough.
“Labour’s election pledges to increase investment and history show CGT is a key lever in promoting investment and growth. Precedent suggests that any changes to CGT rates may be quickly implemented. Investors should consider their investment strategy with this in mind.”
We look at how CGT works, how quickly changes could potentially come into effect, and 10 ways to save on CGT.
How CGT works
Capital gains tax is charged on the profits made when certain assets are sold, or transferred to someone who isn’t a spouse or civil partner.
If all gains in a tax year fall within the CGT allowance (currently £3,000), there is no tax to pay.
However, when you make gains above the annual allowance, CGT on stocks and shares is charged at either 10% or 20% depending on an investor’s other taxable income.
Sarah Coles, head of personal finance at Hargreaves Lansdown, explains: “Provided combined taxable income and gains don’t exceed £50,270, 10% CGT on gains above the annual allowance is paid. Where gains and taxable income exceed £50,270, 20% CGT is paid.
“Where CGT is paid on property, the rates rise to 18% and 28%.”
The government made a record £16.7 billion from CGT receipts in 2021/22, the most recent year we have figures for.
The amount was up 15% from a year earlier, while the number of people paying it rose 20% to 394,000.
Will the government change CGT - and how quickly?
We will have to wait until the Budget to find out if the government is changing CGT. Of course, even if nothing happens in their maiden Budget, we could still see changes later on during the Labour government.
Coles says: “As Rachel Reeves settles into Number 11, attention will turn back to capital gains tax. If Labour don’t get the robust growth they need in order to make their sums add up, there’s a risk this particular tax is in the frame.”
Potential changes include increasing the rates of CGT, or cutting the tax-free allowance.
The government may also choose to apply CGT when a beneficiary inherits an asset - on top of inheritance tax. This could mean bereaved families pay a "double death tax" of more than 50%.
According to Court, it’s not surprising there are rumours around CGT “as its rules have been regularly tinkered with by chancellors in the past”.
She says that changes to CGT are often applied from the start of the following tax year on 6 April, with some announced with six months or less notice.
However, Court warns that they could happen sooner. “In recent years the government has increasingly announced tax changes with immediate effect as part of the Budget or other fiscal events. In addition, business owners will remember the immediate and retrospective changes that were announced to the Entrepreneurs’ Relief limit in March 2020.”
Coles adds that even if the government doesn’t alter CGT, it makes sense to weigh up your position and see if there are ways to save tax.
“Investors are still reeling from the fact that the previous government slashed the tax-free allowance from £12,300 a year to just £3,000 over the course of two years. It means more people face paying more CGT, and anyone who hopes to make any gains from investments, should consider how to protect themselves.”
10 ways to save capital gains tax
1, Consider your tax position next year
Investors often have a choice as to when they take a capital gain, so it’s worth considering what you think could happen to CGT and your overall tax position.
Coles explains: “If, for example, you expect to earn far less income next year and be in a lower tax band, deferring cashing in could mean you pay a lower rate of CGT on at least some of the gain. Conversely, it may be beneficial to take your profits in this tax year if you expect to pay more tax in the future.”
2, Use your annual allowance
Like the ISA allowance, the annual CGT allowance is on a use-it-or-lose it basis. If you’re building up a big gain, you can realise it gradually, over a period of years, £3,000 at a time, and pay no tax. You can sell investments and reinvest the money, effectively re-setting your gains to zero.
3, Offset any losses
You may have losses on some investments and gains on others in any given year. You can use this to your advantage.
“When you complete your tax return, you can add details of the losses you’ve made, which will be offset against the gains when you’re calculating how much CGT you owe. In some cases, this will bring the CGT bill down to zero,” notes Coles.
4, Deduct any unused losses from previous tax years
If you make more losses than gains, you should still make a claim for the extra losses.
Coles says: “You will then be able to carry them forward into next year, to offset against any gains you make then. You can’t do this unless you have made a claim for the loss in the year you made it.”
5, Use a stocks and shares ISA
By moving investments into an ISA, CGT is completely avoided. You can pay in up to £20,000 each tax year across all your ISAs, so check if you have any remaining allowance and whether it makes sense to shift investments. Or, if you’re buying new shares or funds, consider buying them with your stocks and shares ISA.
6, Use Bed & ISA
If you have assets outside an ISA, you can use the Bed & ISA process to sell assets outside an ISA – within your £3,000 CGT allowance - and move them into the ISA wrapper. That way you don’t have to worry about either dividend tax or CGT on these investments at any point.
Investment platforms often offer this service, where they take care of the selling and buying for you, usually for one fee.
7, Pay into a pension
Holly Mackay, founder of Boring Money, thinks we could see changes to capital gains tax, inheritance tax and pensions courtesy of the Labour government.
She says that savers should “hold their nerve and wait for the facts” in terms of any changes to pension rules, and stresses that pensions are a great way to shelter investments from CGT.
“Pensions remain free from capital gains tax and they're a brilliant tax shelter. The rules allow most of us to put in up to a whopping £60,000 a year, so there may be some logic to contributing whatever spare cash you can this tax year [in case] anything changes.”
Pension savers also benefit from tax relief, giving your nest egg an extra boost.
8, Don’t forget Sharesave schemes
Workplace share schemes can be incredibly valuable, but they may come with a capital gains tax sting. Fortunately, there’s an ISA rule that helps you save CGT on shares from a Sharesave scheme or Share Incentive Plan (SIP).
Coles reveals: “As long as you transfer the shares into an ISA within 90 days of the scheme maturing, and they are valued at less than your annual ISA allowance of £20,000, there won’t be any CGT to pay on these shares.”
9, Plan as a couple
If you’re married or in a civil partnership, you can transfer the ownership of some assets to your spouse or civil partner. There’s no CGT to pay on the transfer.
Coles explains: “When they sell up, there may well be tax to pay, and the gain will be calculated by comparing the cost on the day of selling with the day when their spouse originally bought the asset. However, they have a CGT allowance of their own to take advantage of, so a chunk of the gain won’t be subject to tax. If they’re taxed at a lower rate, they may also pay any CGT at a lower rate too.”
10, Consider CGT-free investments
Finally, consider CGT-free investments for your portfolio in future. They include gilts and things like venture capital trusts. VCTs are risky, so should only be considered as a small part of a large and diverse portfolio - but they are tax-efficient. In addition to the CGT and dividend tax saving, you can get up to 30% income tax relief on the amount you invest.
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