All Gains, more pains – How is the budget increase in Capital Gains tax going to affect your investments?
With all of the media hype about the recent budget, its easy to get caught up in a sense of melancholy over the seemingly endless punishment issued to the tax payer by government. One hot topic in particular is the immediate change to Capital Gains tax. (CGT).
However, as bad as this seems right now, its important to remember that changes to our taxes like this have been going on for many years. The challenge for us all is how best to navigate the new landscape in the best way that hurts us the least and that is, just like it always has been, still possible.
Over many years we have seen the slow reduction in tax breaks for the investor. If you go back far enough, Capital Gains tax legislation provided a range of ways in which you could legally reduce your bill.
Reducing your Capital Gains Tax bill
For example, you could reduce the rate of CGT you paid depending on how long you held the asset, this was called “Taper relief”, you could “Bed and breakfast” your shareholdings (a tactic where you sold shares on the last day of the financial year and bought them back again the following morning on the start of the new financial year, allowing you to use your annual Capital Gains tax allowance to create a tax free profit that you reinvested immediately.) and you could “index” your gains! (A permitted practice of increasing the purchase price of your asset by the relevant rate of inflation, to reduce the taxable profit on your investment.)
Taper relief was scrapped in 1998, “Bed and Breakfasting” your shares was banned in 1998 and “Indexation allowance is no longer available to individuals and was frozen for companies on 31st December 2017.
The annual CGT allowance has been reducing for a few years now, in this tax year (24/25), the first £3,000 (£1,500 for trusts) of any capital gains you make are not taxed. From April 6th 2025 this allowance disappears altogether so all of your gain will be taxed.
Exemptions from Capital Gains tax
Besides the £3,000 annual exemption there are some others of importance that remain.
- Private Home – the home that you live in remains exempt from CGT.
- Private car – this is a tricky one, officially, if you own a car for personal use and are lucky enough to sell it for a profit, that will be free from CGT. However, if you buy a classic car for example, as long as it was bought or private use and is used as such then any profit MAY be free of CGT. But if you do not use it for personal means and it is kept in a warehouse, it COULD be considered an investment and therefore taxable. It’s a very grey area and as there is becoming a greater focus on Classic cars as an alternative investment asset, how HMRC views this particular area could change in the near future.
One also has to be careful of fractional ownership of classic cars through companies offering investments in this way. Many of these companies market the fact that the profit in the car is free of CGT but this could be misleading. Normally a Limited company is set up to buy and own the car and your investment buys shares in this company. It is therefore vital to remember that any profit made by the car is a taxable trading profit of the company and when you sell your shares in the company to redeem your investment, any profit made there is taxable as CGT in the normal way. So you could actually pay tax twice on your investment by doing it this way.
- Gifts to charity are free from CGT.
- Transfers of an asset to your spouse or civil partner are free from CGT.
How much Capital Gains tax could I pay now?
Current rates of Capital Gains tax are 18% for basic rate taxpayers and 24% for higher rate taxpayers.
Notoriously complicated, it is important to remember that the rate of CGT you pay is determined by your income and you cannot use your personal allowance to offset a CGT bill.
So if you earn £30,000 a year but make a taxable gain on a buy to let property of £60,000, at the moment, £3,000 of that would be tax free using your annual CGT allowance, leaving a taxable gain of £57,000.
Of that, £20,270 would be taxed at 18% and the remaining £36,730 would be taxed at 24%.
However badly done to we feel now, spare a thought for tax payers between 1965 and 1988 when most gains paid tax at 30% and in 1988, the highest rate was 40%.
The biggest problem is, although rates are lower than they have been historically, there are likely more people now caught in the Capital Gains Tax trap because of increased investment and entrepreneurial activity over the last 40 years.
So what options do we have now for investments?
- Firstly, we should all, where possibly, make full use of the annual ISA allowance. We can put £20,000 a year in to an ISA to build tax efficient capital growth.
- If your risk profile permits, you could invest in Enterprise Zone trusts (EIS) and Venture Capital Trusts (VCT). These investment vehicles were recently given a life extension of 10 years and you can get 30% income tax relief on the value of the investment, tax free capital growth and with the VCT, interest free dividend income.
- Also, if held for 2 years or more the EIS offers 100% inheritance tax relief.
- Factor in the tax -If you know you will pay £24,000 in tax on an investment gain of £100,000, remember that, if, for example your portfolio is worth £1 million, that 24% represents only 2.4% of the total portfolio value, so if you have specific income or growth objectives, you can adjust your investment strategy to target a higher growth rate to allow for the effect of the tax. True, higher gains will result in higher tax, but this shows it is possible to target returns net of tax efficiently and that while 24% seems like a high figure, as a proportion of your total portfolio value, it may not be.
Overall, while the tax increase is not welcome, it should not affect your long term investment plans and objectives.
If you would like to review your investment portfolio or discuss how we can help manage new investments please do get in touch here.