Could you lose out to a capital beneficial properties tax raid? How to keep away from it

Investors are nervously awaiting the Autumn Budget after Keir Starmer warned that 30 October is ‘going to be painful’, ramping up fears of a tax raid

A prime target appears to be capital gains tax, which is charged on profits when people sell assets such as shares and other investments, as well as buy-to-let properties or second homes and businesses. 

For landlords, second homeowners and entrepreneurs there is little they can do between now and the end of October to sell even if they wanted to – and the decision to sell up is so substantial that they should avoid trying to do so swiftly.

But for small investors with stocks and shares held outside of an Isa, the situation is different and it is possible to act now 

Investment experts say that for many individual investors with skin in the game, the question is whether they should cash in some profits and pay a lower rate on them before the Chancellor potentially hikes capital gains tax.

Small investors are already at a much greater risk of being dragged into the capital gains tax net, after former Chancellor Jeremy Hunt slashed the annual tax-free allowance from £12,300 to just £3,000 in a year.

But investors should tread carefully, as there is, of course, no guarantee that a capital gains tax rise will even arrive and Rachel Reeves has kept tight-lipped so far.

‘I’m not going to write a Budget two months ahead of delivering it,’ the Labour Chancellor said on Wednesday.

The investors at risk from a capital gains tax raid are those with larger holdings held outside of an Isa. They are often long-term investors and include those who have built up pots in work share save schemes and pensioners using dividends to supplement their income. 

So with a possible capital gains tax rise on the horizon, what should investors tempted to sell out now do?

Craig Rickman, personal finance expert at Interactive Investor, said: ‘Investors are understandably nervous about possible hikes to CGT and the impact this could have on their future wealth.

‘However, making knee-jerk decisions with your portfolio based on speculation can be risky approach, as Labour’s recent move to double-back on its pledge to reinstate the pensions lifetime allowance illustrates. 

‘In most cases it’s best not to let the tax tail wag the investment dog.’

What is capital gains tax?

Capital gains tax is levied on profits, so the difference between the price paid for something and the amount it is sold for.

CGT is levied on assets ranging from stocks and shares to second homes, buy-to-let properties and even some personal possessions.

There is an annual capital gains tax-free allowance of £3,000 and investors must pay tax on any gains above this. Losses on the sale of investments can be deducted from gains on others.

Assets held in an stocks and shares Isa or pension are exempt from CGT when you sell. 

Capital gains tax rates depend on an individual’s tax bracket and the type of asset sold.

Basic rate taxpayers with taxable income below £50,270 pay 10 per cent capital gains tax, while higher and additional rate taxpayers pay 20 per cent. 

Rates are different on residential property that isn’t your own home (which is exempt). Profits on second homes and buy-to-lets face capital gains tax rates of 18 per cent for basic rate tax payers and 24 per cent for higher and additional rate tax payers (the latter rate was reduced from 28 per cent as of April 2024).

Profits are added to other income to decide the rate paid. 

A higher rate tax payer selling shares worth £9,000 and making no other gains that year would pay tax at 20 per cent on the £6,000 amount above their £3,000 annual allowance, so £1,200.

A basic rate tax payer would pay CGT on the same amount at 10 per cent, so £600. 

A higher rate tax payer selling a buy-to-let and making a £50,000 profit would pay tax at 24 per cent on £47,000, so £11,280.

There is a separate CGT rate for entrepreneurs selling businesses they have built up. Business Asset Disposal Relief means they pay tax at 10 per cent on all gains on qualifying assets. 

How much could capital gains tax be hiked by? 

If Rachel Reeves does raise capital gains tax, one suggestion is that CGT could be aligned with income tax.

This would bring CGT rates to 20 per cent, 40 per cent and 45 per cent.

But if such a big move was made, experts say the government should theoretically also bring back indexation, which means that only returns above inflation are taxed.

The Liberal Democrat manifesto advocated raising capital gains tax rates to match income but allowing for inflation. 

Interstingly, Jeremy Corbyn’s Labour manifesto in 2019 called for a similar thing and allowed for only taxing gains above a risk-free rate of return.

Alternatively, Reeves could raise capital gains tax rates by a bit but not make them as high as income tax rates.

Would hiking capital gains tax bring in more money? 

Those in favour of a rise argue that the lower rate of CGT allows wealthier people to benefit, as they are more likely to have investments, and that raising the rate could rake in £16.7billion. 

Critics say that a hike is unlikely to bring in that much, as investors may avoid selling up. There is evidence from previous tax changes in the UK and around the world that shows this. Jeremy Hunt reduced CGT for buy-to-let landlords to encourage them to sell.

AJ Bell’s personal finance director Laura Suter said: ‘There’s the possibility that the new government may look to raise revenues from CGT. Although it’s difficult to predict what may happen.

‘The government’s own figures show that a big increase in CGT rates could backfire and actually lead to lost revenue for the government. For example, raising both the lower and higher CGT rates by 10 percentage points, to 20 per cent and 30 per cent for non-property gains, would result in a total loss of £2.05billion for the Exchequer by 2027/28. 

‘That’s because while the rates are higher, investors would be expected to change their behaviour to mitigate paying the tax.’

Meanwhile, the CGT allowance of £3,000 is unlikely to be lowered, according to Rob Morgan, chief investment analyst at Charles Stanley, being ‘already low enough’ to avoid coming under fire.

The allowance was only recently reduced from £6,000 in April this year, and from £12,300 in April 2023.

When could CGT changes come in?

Regardless of what the new Government has in store, nothing will be announced until the Autumn Budget in October, that much is clear.

If Reeves does pull the trigger on CGT hikes, these could come into force immediately or in the new tax year.

Some argue they will be immediate to head off investors looking to sell ahead of a tax rise, whereas others say they may not come in straight away. 

Rob Morgan thinks a hike would be delayed. He said: ‘Any change would likely take effect from the next tax year starting in April, so investors would probably have time to digest the consequences of any Budget announcement on this before it takes place.’

What can investors do to beat a CGT hike?

It is important investors don’t make any panic-induced decisions to sell up without taking everything into consideration.

Unless they plan on spending their funds, investors are likely to want to reinvest any money they receive from selling investments, but if they do this outside of an Isa or pension it opens them to further CGT liabilities on profits further down the line. 

The same would likely not be the case with landlords, many of whom will be hoping to sell before changes come into effect.

To protect your investments, the key is to ensure that they are inside a stocks and shares Isa wrapper to shield them from CGT, or to potentially hold them within a self invested personal pension. It’s important to note Sipp funds cannot be accessed until at least 55 though and that age is due to rise.

There are specific capital gains tax rules that say you cannot sell investments to cash in a profit and then buy the same ones straight back. Instead, investors must wait 30 days or they will lose any tax benefit. An exception is allowed for those selling and buying the same investments back within an Isa or Sipp.

This means that many investors looking to cash in some gains and avoid capital gains tax problems down the line do something called a Bed and Isa. 

This involves selling investments to crystallise a gain and capital gains tax liability and then buying them back within a stocks and shares Isa. 

Rob Morgan says: ‘As part of your ongoing tax planning, it makes sense wherever possible to shelter assets in an Isa to avoid tax on profits, as well as on dividends and interest,’ Morgan said.

 ‘Where you have assets outside an Isa it’s possible to sell and rebuy them in the tax wrapper in a process known as a ‘Bed and Isa

‘This realises any gain at that point but shelters the investment going forward.’

Be aware that with a Bed and Isa you must stick within your annual £20,000 Isa allowance and you may incur a capital gains tax bill if profits are above the £3,000 annual limit. Choosing to shift investments into an Isa, however, means that any future gains will be protected from CGT.

Bed and Isa transactions also protect dividends from tax, the current allowance of which is just £500, having been cut from £1,000 in April 2023.

One option open to investors is to spread sales across different tax years to use allowances from both. 

Jason Hollands, managing director of Bestinvest, told This is Money: ‘Usually Bed and Isa is very much a tax year-end activity, but it would be very prudent to consider doing this before the Budget.

‘Ideally, those seeking to Bed and Isa should try and ensure that any gains realised in the process fall within their annual £3,000 capital gains exemption.’

According to data from Interactive Investor, Bed and Isa transactions on its platform jumped 26 per cent between 1 June and 28 August, compared with the same period a year ago. 

They increased 96 per cent compared to 2022.

Interactive Investor said the uptick comes as a result of the speculation of a CGT hike.

Myron Jobson, senior personal finance analyst at Interactive Investor, said: ‘The threat of a less generous capital gains tax regime has provided the impetus for many of our customers to shift their existing investments into their stocks and shares Isa via Bed and Isa, shielding their future gains and dividends from the clutches of the taxman. 

‘Regardless of what is announced in the Budget, shifting existing investments into a tax-efficient wrapper like an Isa or pension can pay dividends – which, over the long term, is likely to outweigh any charges that might apply.’

> The essential Isa guide: How to save and invest tax-free 

Make the most of your marriage

Investors who are married or in a civil partnership also have another option to reduce capital gains tax bills.

Transfers between spouses do not trigger a capital gains tax liability, so a couple could use their combined £6,000 CGT allowance to cash in investments tax-free. If one partner pays basic rate tax, it may also be worth transferring investments to them to benefit from a lower CGT rate.

If a spouse has not used their Isa allowance, this can be taken advantage of too in order to shelter more in a tax-free wrapper.

Hollands told This is Money: ‘If the gains from selling an investment are going to exceed the £3,000 annual exemption, or if it has already been used up, one important option available to people who are married or in a civil partnership, is to firstly transfer some or all of the shares to be sold to their spouse.

‘Even where a gain is expected to exceed any exemptions available now, it may be better to take a tax hit now when CGT rates are a known quantity rather than wait until they potentially rise much higher. 

‘By making use of interspousal transfers before selling, it may be possible to make sure than any CGT liability is born by which ever spouses is subject to a lower rate of tax.’