If there is one tax that Labour will ramp up in next month’s Budget, my money is on capital gains tax (CGT).
So if you are the owner of a business, buy-to-let property or have assembled an investment portfolio to see you through to retirement and beyond, you need to be aware of what could be coming your way.
In short, a far nastier tax regime when it comes to realising gains from these assets – with tax charges potentially double those that currently apply.
Few people, apart from those wealthy enough to employ expensive tax consultants, will be able to escape its claws, with the Budget only 40 working days away.
However vicious this assault may be, it ticks all of Labour’s boxes.
Although the Prime Minister and his financial lieutenant Rachel Reeves (pictured) have yet to confirm that a ramping up in CGT is coming our way, it’s as obvious as night follows day
For a start, the party deplores the idea of people profiting financially from anything beyond work, especially when those gains are taxed more lightly than employment income – as CGT currently is.
So as far as Labour is concerned, hitting individuals with higher taxes on such ‘unearned’ income is a no-brainer.
It would also allow the Government to claim – somewhat dubiously, I must say – that CGT hikes are not a tax on working people. Throughout the General Election campaign, Sir Keir Starmer waffled on about this commitment, which was built around not increasing rates of income tax, National Insurance contributions and VAT.
But many working people have investments or own an income-generating buy-to-let property. Hiking CGT rates will certainly constitute a tax rise for these people, albeit only when they come to sell.
Although the Prime Minister and his financial lieutenant Rachel Reeves have yet to confirm that a ramping up in CGT is coming our way, it’s as obvious as night follows day.
Jeff Prestridge predicts a rise in capital gains tax in next month’s Budget
Calls for a more onerous CGT reform have been long-standing. In late 2020, the now defunct Office Of Tax Simplification published a report arguing that the ‘disparity’ in rates between income tax and CGT led to decision-making which was not always in the best interests of the economy.
Gianpaolo Mantini, a chartered financial planner at wealth manager Saltus, says this report could now be ‘easily used’ by Labour to justify a more punishing CGT regime.
In recent days a Left-leaning think-tank, the Institute For Public Policy Research (IPPR), has also had its two pennyworth, arguing that the current tax system would frustrate Labour’s grand ambition to rebalance the country. It says the system perpetuates regional inequalities – put crudely, that it favours people who live in the South East and disadvantages those in the North.
The solution? Several reforms are suggested, but the big one is equalising CGT rates with those on income.
It would be a big surprise if Chancellor Rachel Reeves didn’t include this tax move in her Budget on October 30. So how might the CGT regime change – and, more importantly, can you mitigate its effect?
You can if you act quickly.
WHERE ARE WE NOW WITH CGT?
Capital gains tax is charged on the profits made from the sale of various assets.
These include investments, big-ticket personal possessions such as paintings and jewellery, second homes and buy-to-let properties, your own business – even cryptocurrency.
Cars and main homes fall outside the CGT net (for the time being – anything is possible with this Labour Government). For sales of shares, unit trusts and personal possessions, basic rate taxpayers typically pay 10pc (sometimes more) on their gains. Higher-rate and additional-rate taxpayers pay 20pc. For property sales, CGT rates are higher, at 18pc and 24pc respectively. The only concession is that £3,000 worth of capital gains can be ‘crystallised’ in the current tax year, making it free of CGT.
AND WHAT COULD HAPPEN?
It is unlikely the £3,000 annual capital gains tax-free allowance will be trimmed in the Budget, although stranger things have happened in the past.
Under the previous Conservative government, the allowance took a severe haircut, from £12,300 in the tax year ending April 5, 2023, to £3,000 now.
So my money is on it staying at £3,000 – its lowest level since the early 1980s.
What is more likely is for Ms Reeves to adopt the IPPR idea and align CGT rates with income tax rates.
So for basic rate taxpayers it would mean a 20pc cent minimum tax charge, while for higher and additional-rate taxpayers they would pay 40pc and 45pc respectively on gains above the £3,000 tax-free allowance.
The effect of such a change is best illustrated in pounds and pence.
Take someone who, in the current tax year, has taxable income (after all allowable deductions and their personal allowance) of £30,000. This means their income is below the upper limit of the basic rate income tax band of £37,700 – income tax rates in Scotland are slightly different.
Let us then say they crystallise a £20,000 gain from the sale of shares. For CGT purposes, the taxable gain is £17,000 (£20,000 minus the £3,000 tax-free allowance).
During the election, Sir Keir Starmer – here with Rachel Reeves – waffled on about commitments and Labour claim CGT hikes are not a tax on working people
Currently the CGT charge is 10pc on £7,700 of the gain (the remainder of the investor’s basic rate income tax band) with the rest (£9,300) charged at 20pc. The CGT bill is £2,630, a tax rate of 15.5pc.
But if Labour heeds the IPPR’s advice and aligns CGT rates with income tax rates, the CGT bill would become £5,260 – a doubling of the rate to 31pc.
Painful, very painful… but not all is lost.
WHAT YOU CAN DO TO MITIGATE THE IMPACT
If the Chancellor increases CGT rates in the Budget, there is a big chance they could come in straight away.
It’s a transactional tax, so there is no need for her to wait until the new tax year on April 6.
Although buy-to-let owners can do little between now and the Budget to avoid higher CGT rates (other than hang on to their properties until CGT rates possibly come down under a future government), investors have options – especially if they hold shares outside of tax-friendly individual savings accounts (Isas) and pensions.
If you sit in this camp, you could take £3,000 of investment profits between now and the Budget, escaping CGT altogether (provided you haven’t taken any gains
earlier in the tax year).
You could simply bank the proceeds – or you could sell the shares and then buy them back, resetting their purchase cost for future CGT assessment.
If you do this, you must wait at least 30 days before buying back the shares.
But an even better approach is to sell shares with gains under the £3,000 annual tax-free allowance, and then buy them back in a stocks and shares Isa where future profits are free from CGT (and, just as importantly, future dividends are protected from dividend tax).
The provider of your Isa should do all the hard work for you.
With these so-called ‘bed and Isa’ transactions, the 30-day rule does not apply – although the repurchase will attract a trading fee and 0.5pc stamp duty.
The amount going into the Isa will count towards your annual Isa allowance of £20,000.
Investing platform Interactive Investor says ‘bed and Isa’ transactions by clients increased by 99pc in the three months to the end of August, compared with the same quarter in 2022.
Myron Jobson, personal finance analyst at the platform, says: ‘The threat of a less generous CGT regime has provided the impetus for many customers to shift their investments into their stocks and shares Isa via “bed and Isa” – shielding their future gains and dividends from the clutches of the taxman.’
In a similar fashion, investments can be sold with gains under the £3,000 tax-free allowance and then bought back in a self-invested personal pension, again protecting future gains from CGT.
The only drawback, as Susannah Streeter of Hargreaves Lansdown points out, is that you can’t access your pension until age 55 (this will rise to 57 in April 2028).
AND OTHER SMART ADVICE
If you’re married or in a civil partnership, it could be wise to sit down with your other half and – with CGT in mind – work out who should hold any investments.
Dividing investment portfolios – using an interspousal transfer – means two annual tax-free allowances can be used to protect crystallised share gains from CGT.
It also means the lower-rate taxpayer can reduce any CGT bill on gains exceeding their annual tax-free allowance. Again, your broker or investing platform can do all the hard work – for a small charge.
Finally, it goes without saying, that now is the time to fill your boots with Isas.
As Jason Hollands, investment expert at Evelyn Partners says, Isas should be ‘investors’ first port of call’ – with pensions not far behind.
jeff.prestridge@dailymail.co.uk