Capital Gains Tax: How to Plan Ahead for Potential Changes

Introduction

With the October Budget approaching, speculation around changes to Capital Gains Tax (CGT) is intensifying. Many experts believe the Chancellor may introduce new measures to either raise the CGT rate or reduce allowances in a bid to generate more revenue. If these changes come into effect, they could significantly impact how individuals and businesses manage their assets.

Now is the time to assess your current financial situation and prepare for potential changes. In this blog, we’ll explore how CGT works, what changes may be on the horizon, and practical steps you can take to minimise your exposure.

How Capital Gains Tax Currently Works

Capital Gains Tax is charged on the profit you make when you sell or dispose of an asset that has increased in value. The most common assets that attract CGT are property (excluding your primary residence), stocks, shares, and business assets. The tax is applied only to the gain (profit), not the total value of the asset.

Currently, individuals have an annual CGT allowance of £6,000 (£12,300 until April 2023). Any profits above this threshold are taxed at 10% for basic rate taxpayers and 20% for higher rate taxpayers. For residential property, the rates are higher—18% and 28%, respectively.

What Changes Could Be Coming?

While the details won’t be confirmed until the Budget is announced, there are several potential changes to CGT that could be introduced:

1. Reduction of the Annual Exemption

Some speculate that the Chancellor could reduce the annual CGT allowance even further, meaning more individuals would be required to pay tax on their capital gains. A lower exemption threshold would bring more modest gains, such as small property sales or stock investments, into the tax net.

2. Increase in CGT Rates

Another possibility is that CGT rates could be aligned more closely with income tax rates. This would result in higher taxes for individuals, especially higher rate taxpayers, as gains would be taxed at 40% or 45%, rather than the current 20%.

3. Introduction of CGT on Death

Currently, when an individual dies, their assets pass to heirs with a “step-up” in value, meaning that any capital gains accrued during the deceased’s lifetime are wiped out. This step-up could be removed, potentially exposing estates to both inheritance tax (IHT) and CGT on death.

These changes could have a significant impact on the way individuals plan to dispose of or transfer their assets in the future, making it crucial to review your position now.

Steps to Take Now to Protect Your Assets

With the possibility of less favorable CGT rules on the horizon, it’s important to be proactive. Here are some strategies you can consider:

1. Bed & ISA for Existing Investments

If you hold investments outside of an ISA, you can use the “Bed & ISA” process to shelter those assets from future capital gains tax. This involves selling your investments and reinvesting them in a tax-efficient stocks and shares ISA. This way, any future growth within the ISA will be free from both CGT and dividend tax, allowing your investments to grow tax-free.

2. Use Your CGT Allowance Now

If you’re sitting on gains that exceed the current CGT allowance, it may be worth realising those gains before any potential changes to the threshold or tax rate. You can spread your disposals over multiple tax years to maximise your use of the annual allowance, keeping your tax liability as low as possible.

3. Transfer Assets to Your Spouse

Spousal transfers are currently exempt from CGT, making this a valuable tax-saving tool. If your spouse is in a lower tax bracket or has unused CGT allowance, transferring assets to them can reduce the overall tax burden on gains. By managing investments between spouses, you can take full advantage of both of your CGT allowances and tax rates.

4. Review Your Portfolio

Now is an excellent time to review your entire investment portfolio. Consider diversifying your investments into tax-efficient vehicles such as ISAs or pensions, which can help shelter gains from tax. For property investors, disposing of non-essential assets or transferring them to a spouse may be beneficial.

5. Plan for Gifting

If CGT on death becomes a reality, gifting assets to family members while you’re still alive could be a strategic move. You can make use of annual gift allowances or the seven-year rule, where assets given away more than seven years before death fall outside of your estate for inheritance tax purposes.

Conclusion

While we won’t know for certain what changes to CGT will be introduced until the October Budget, now is the time to review your financial position and plan ahead. By maximising your use of existing allowances and exploring tax-efficient strategies, you can mitigate the potential impact of higher taxes on your gains.

Consulting a financial advisor or accountant is a smart step to ensure you’re making the most of the current rules and preparing for any changes. Stay informed, act early, and take control of your financial future before the Budget reshapes the landscape of Capital Gains Tax.