Don’t panic – you CAN dodge the good capital good points seize: JEFF PRESTRIDGE explains easy methods to beat the Budget and safeguard your wealth portfolio from Rachel Reeves’ tax claws
Of all the unpleasant personal finance measures announced in the Chancellor’s high-spending, high-taxing Budget, the one that took most experts by surprise was the hike in capital gains tax (CGT) on share sales.
Not the increases themselves – chattering Treasury officials had widely let it be known pre-Budget that the rates would be going up – but the fact that they came in straight away.
It means that anyone selling shares must now do so cognisant of the fact that the old CGT regime is no more. Finito. New higher rates now apply.
So, instead of investment profits being taxed at a minimum 10 pc for basic-rate taxpayers and 20 pc for higher and additional-rate taxpayers, they will now attract respective rates of 18 pc and 24 pc.
Thankfully, the first £3,000 of gains banked in any tax year – the snootily named ‘annual exempt amount’ – remains (thank you Rachel Reeves).
According to the Office for Budget Responsibility, the new rates will raise precious little extra revenue for the Chancellor’s kitty in the current tax year. But by the time the 2029 tax year has completed its course, it will be bringing in some £2.5 billion (aided by CGT receipts from a few other sources).
Yet, for the majority of you who are currently on an investment journey – or are about to embark on one – there is no reason why you should fall foul of this CGT grab. Through the prudent use of wealth tax wrappers and smart reorganisation of investments, you can even avoid it altogether.
Just think how good that would feel – a wealth portfolio immune from Reeves’s tax claws. Here’s how you do it…
Eat, sleep and breathe ISAS
An Individual Savings Account (Isa) is a wrapper that allows you to build an investment fortress free from tax.
This means there is no CGT on gains made on investments held inside the tax-free wrapper – be it from UK shares, international shares, investment funds or investment trusts. Nor is there any tax on dividends generated from the investments. Also, and importantly, withdrawals from Isas are tax-free.
You should view an Isa as a personal tax haven – an adjunct to a pension. So, whenever you invest from now on, maybe because of an investment article you’ve read in this newspaper, I urge you to always go down the Isa route. Think Isa.
If you’ve already got an investment (stocks and shares) Isa, use it – don’t invest outside of it unless you’ve already exhausted your annual £20,000 allowance.
If you haven’t got an investment Isa and wish to accumulate long-term wealth, set one up.
It’s easy to do online – leading providers include AJ Bell, Fidelity, Hargreaves Lansdown, and Interactive Investor. Most banks also provide them, and you can usually get details from a local branch as well as online.
As mentioned, the rules allow you to contribute up to £20,000 in the current tax year into an Isa. If you’re married or in a civil partnership, that means £40,000 between you – doubly generous. Although you should always be sceptical about what politicians say, Ms Reeves did state in her Budget that the £20,000 annual Isa allowance will remain in force until April 2030.
Just think about that in cash terms. Including this tax year, it gives you the opportunity to squirrel away a maximum £120,000 into an Isa between now and April 2030 – £240,000 per married couple. That gives you great scope to protect your wealth from tax. Finances permitting, take advantage.
And don’t forget about investment Isas for your children. You can invest up to £9,000 a year into a so-called Junior Isa (Jisa) up until your son or daughter reaches age 18 – relatives can also put money into the account.
The tax breaks are the same – no tax on income and no CGT. And Ms Reeves has also promised to keep this £9,000 annual allowance going until April 2030.
Just one warning: unlike an adult Isa, a Jisa can’t be accessed until age 18.
Other anti-CGT measures…
If you hold investments outside of an Isa, CGT will not become an issue until you decide to dispose of them.
You may wish to keep your portfolio intact – maybe in the hope that in the future a new government may introduce a more benign CGT regime with
a higher annual exemption (it was £12,000 back in 2019).
But there is nothing to stop you gradually reducing your portfolio’s exposure to CGT.
For example, you could use your exemption to take £3,000 of profits tax-free every year.
Alternatively, you could sell £3,000 of shares and then, through a process called ‘bed & Isa’, buy them back inside your Isa. By doing this, you pay no CGT on the sale (the bed) while moving the shares into a CGT-free wrapper. Your Isa provider will do this for you. Just be aware that the transaction
must be within your permitted £20,000 allowance.
You can also do the same with a self-invested personal pension (bed & pension).
Moving assets
Finally, if you are married or in a civil partnership, ensure any investments you own outside of Isas and pensions are held to your best overall tax advantage.
For example, you can transfer shares to your spouse without triggering a tax charge. By making such an ‘interspousal transfer’, you then have two CGT annual exemptions at your disposal.
Transferring shares to the partner who is a lower-rate taxpayer also means less tax to pay on future capital gains that exceed £3,000 – 18 pc instead of 24 pc. Your broker or investment platform should be able to help with transferring shares.
Yes, dear reader, with a little bit of planning, your investment journey can avoid the perils of CGT. How glorious that will be.
