Rachel Reeves announced a hike to capital gains tax on small investors, raising the tax on stocks and shares to match the higher rates currently paid on property.
Setting out the new rules in her much-awaited Autumn Budget, Reeves said capital gains tax would be increased to 24 per cent from 20 per cent for those paying higher rates of tax.
But it was basic rate taxpayers who faced the biggest blow, as their capital gains tax rates will rocket from 10 per cent to 18 per cent.
We look at what capital gains tax is and what the changes mean for investors.
Tax hike: Chancellor Rachel Reeves has increased capital gains tax rates in line with the current property tax rates
What is capital gains tax?
Capital gains tax, known as CGT, is levied on profits on assets including stocks and shares, second homes, buy-to-lets and some personal possessions.
There is an annual capital gains tax-free allowance of £3,000 and the tax is charged on profits above this. Losses on the sale of investments can be deducted from gains on others.
Although capital gains tax is separate to income tax, rates are decided by people’s income tax bands and profits are added to other income to decide the rate paid.
Basic rate taxpayers previously paid 10 per cent CGT, while higher and additional rate taxpayers pay 20 per cent.
From today, the rates have been hiked, with basic rate taxpayers now paying 18 per cent capital gains tax and higher and additional rate taxpayers charged 24 per cent.
There were already these higher rates for profits from second homes and buy-to-lets, at 18 per cent for basic rate taxpayers and 24 per cent for higher and additional rate taxpayers.
Therefore, today’s changes mostly affect those who invest in the stock market.
There is a separate rate for entrepreneurs selling businesses. Business Asset Disposal Relief means they pay tax at 10 per cent on profits up to £1million. This will also see rates raised but not immediately. Entrepreneur’s CGT will rise from 10 per cent to 14 per cent in April 2025 and then to 16 per cent in April 2026.
> How capital gains tax works: What it is charged on and how much you pay
Why has Labour hiked capital gains tax?
The move comes as part of Labour’s pledge to plug a claimed £22billion ‘black hole’ in the country’s finances and was announced alongside a number of other tax rises.
According to Reeves, the hike to capital gains will raise as much as £2.5billion to help address the shortfall.
> How to protect your wealth from Labour’s Budget tax raid
When will capital gains tax changes come in?
The new capital gains rates will take effect from today, 30 October, as opposed to in the new tax year, according to the Treasury.
There is form for capital gains tax hikes coming in immediately. Tory Chancellor George Osborne hiked the levy in 2010, with the rise being instituted from midnight after the Budget.
This is to avoid mass selling of assets ahead of the new rules.
Who will the CGT hike hit?
The Government said it is ‘ensuring that the UK tax system remains internationally competitive, with headline rates below France, Germany and Italy.’
It added that the tax is paid by fewer than one per cent of adults each year. HMRC data shows that 369,000 paid capital gains tax in the 2022/2023 tax year, with proceeds amounting to £14.4billion.
However, those figures relate to a time when the capital gains tax allowance was more than four times higher than now.
The tax-free allowance was previously slashed under the Conservative Government from £12,300 to its current £3,000.
Sarah Coles, head of personal finance at Hargreaves Lansdown said: ‘Talking about things like capital gains tax as “wealth taxes” obscures the fact that many people on average incomes, who’ve invested carefully throughout their lives, can face a tax bill when they rebalance their portfolio or sell up to cover their costs later in life.
‘The annual allowance of £3,000 doesn’t stretch particularly far when you’re selling an investment you’ve held for 30 years or more, so investors should consider how to protect themselves.’
She added: ‘Investors also have to cope with the fact that frozen income tax thresholds have pushed more people into higher rate tax – automatically pushing up their capital gains tax rate. A combination of all these things means more people face paying more of this tax.’
Investing tax-free allowances were slashed by former Chancellor Jeremy Hunt
The move, according to Görkem Barron at Lubbock Fine Wealth Management, could also reduce investment in shares.
She said: ‘Such a large increase in CGT will impact private investors – it disincentivises investment in shares. There’s a real danger that this will erode share ownership culture in the UK.’
‘There’s a particular risk that shares geared towards capital growth – especially in the UK tech sector – will be hit hardest. UK smaller tech stocks benefit enormously from retail investment – and the Chancellor has now made investing in tech far less attractive.’
Agreeing, Simon Merchant, chief executive of savings platform Flagstone, said: ‘Investors must now choose which investments to keep and which to divest to minimise the impact of higher CGT liability further down the line. More than a third of Flagstone savers expect to invest less now or in the future as a result of the CGT change.’
How to cut your CGT bill?
Making use of tax-friendly investing wrappers can go a long way to reducing or removing capital gains tax liability. For many investors, the Isa allowance of £20,000 and the £60,000 pension allowance can cover most of their investments.
Investors should also consider using their annual £3,000 capital gains tax allowance in full each year – potentially shifting investments into Isas.
Myron Jobson, of interactive investor, said: ‘The double whammy of swingeing cuts to the CGT allowance in April and the rise in CGT rates provides extra impetus for investors to do what they should already be doing: making the most of tax-efficient wrappers like Isas and pensions, which shield gains and income generated from investments from tax.’
Some investments are free from capital gains tax and may prove more popular.
Chris Rudden, head of UK investment consultants at digital wealth manager Moneyfarm, said: ‘It’s more important than ever for investors to strategically manage their wealth to minimise the impact.’
He added that investors should ‘consider investments in government bonds, which are exempt from CGT, which may be a prudent move. It’s also worth exploring the option of ‘locking in’ gains at the current rates before the new rates take effect, thereby setting a higher base for future calculations.’