How I’m swerving the expected increase in capital gains tax

Rachel Reeves’s first budget on October 30, the day before Halloween, could be a horror show for long-term investors. Capital gains tax (CGT) bills could double if, as widely feared, the chancellor brings CGT rates into line with income tax.
Worse still, without any indexation to reflect how the real value (or purchasing power) of money has shrunk since it was invested, CGT effectively imposes taxation on inflation. Put another way, your profits might be illusory but your CGT bill will be real.
This is not a party political point because it was the Conservatives who cut the annual amount of gains that could be taken before CGT bites from £12,300 per person two years ago to £3,000 today.
On the other hand, it was Labour that scrapped indexation for CGT calculations in 2008. Lest that sound a tedious technicality, bear in mind that the Bank of England calculates that to match the real value of a tenner back then, you would need £15.79 today.
No wonder cynics say that politicians believe they need our money more than we do. Keir Starmer has warned us that the budget will be painful but ruled out increasing income tax, national insurance or VAT.
Starmer is staring into “a £22 billion black hole” in the public finances and CGT is one of the few ways he could plug that gap with other people’s money. But the good news is that prompt action can be taken to avoid budget tax rises.
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Basic-rate taxpayers pay CGT at 10 per cent on profits from most assets, including funds and shares, or 18 per cent on property that is not your main home. High earners pay 20 per cent on assets and 24 per cent on property.
Income tax is 20 per cent for basic-rate payers and 40 to 45 per cent for higher earners. The lower rates of CGT are intended to reflect the fact that most investments are made out of income that has already been taxed.
Aligning the rates of these taxes could mean double trouble. Myron Jobson from the wealth manager Interactive Investor said: “Even basic-rate taxpayers would face doubling the amount paid above the £3,000 tax-free allowance, which translates to a CGT liability of £400 on capital gains of £5,000, compared with £200 under the current regime. Additional-rate taxpayers could face a tax charge of £21,150 on a £50,000 capital gain, compared with their current tax liability of £9,400.
“These potential increases may be even more painful for basic-rate taxpayers with larger gains, who could be pushed into a higher tax bracket. A basic-rate taxpayer earning £30,000 could end up paying £14,746 tax on a £50,000 gain, of which over £10,000 is higher rate tax.”
Fortunately, any changes announced in the budget are unlikely to be retrospective, so the new rates of CGT should not affect sales made before October 30.
If you wish to keep your assets, rather than sell, there is still time to squirrel them away in tax shelters, such as Isas or pensions. Both are government-approved ways to place wealth beyond the grasp of HM Revenue & Customs (HMRC). Best of all, for those of us who hate paperwork, any subsequent gains or income within these shelters do not need to be declared in tax returns.
That’s why, when it comes to considering potential changes to CGT in the budget, it’s only fair for me to declare a lack of interest. Nearly all my shares, apart from a handful I hold for perks or shareholder discounts, are held in Isas and self-invested personal pensions.
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You can only place up to £20,000 a year per person in an Isa and there are more complex restrictions on pensions. For technical reasons, depending on which assets you want to shelter, there might be less time left for avoidance action than you think.
Jason Hollands from the wealth manager Evelyn Partners said: “Anyone who still has some share certificates left from the days before online investment platforms should get their skates on if they want to crystallise gains at current levels of CGT.
“To sell their shares, they will first need to transfer them to the nominee account of a broker or online platform, which will involve completing a stock transfer form. Only once the shares are held on the nominee account can they then be sold.
“The whole process can take a couple of weeks, depending in part on the speed of the postal service. So people in this situation should act without delay.”
Online investment platforms show live prices for the fluctuating values of funds and shares, making it easy to see exactly how much we will get when we sell. This is sometimes called the “bid price”, which is slightly lower than the “offer price” at which funds and shares can be bought.
Don’t forget that everyone, including children, has a £3,000 CGT annual allowance. So it may be worth considering transferring assets to a partner, spouse or child before realising gains.
Where you have no urgent need for cash, CGT can be swerved by simply not selling any assets and postponing profits. Any CGT liabilities disappear on the death of the owner, when the estate — or total assets, less any liabilities, such as debts — is subject to inheritance tax (IHT).
Everyone is allowed to pass on up to £325,000 before any IHT need be paid, and the threshold rises to £500,000 where the donor’s home is given to children or grandchildren. IHT applies at a fixed rate of 40 per cent. This means that homeowners who were basic-rate taxpayers all their lives can become higher-rate taxpayers when they die. Even so, try to avoid the fear of fiscal changes overwhelming your long-term financial plans — don’t let the tax tail wag the investment dog.
Beware that the prime minister’s “painful” warning might have been intended to manipulate our expectations so that, fearing the worst, we find budget day not too bad. But that might prove to be merely wishful thinking.
Everyone whose aim is to accumulate wealth should beware that Isa and pension allowances — the annual maximum limits on contributions — mean what they say. It really is a case of use them or lose them. Folk who have already made their pile should consider CGT allowances in the same way and remember that they cannot take wealth with them. Paper profits are all very well but you haven’t really made a penny until you sell.
Finally, beware of clever Dick schemes to cut tax bills that can even constitute a criminal offence. If you are in any doubt, consult a fully authorised accountant or financial adviser. As one of the former group of professionals told me long ago, the difference between legal tax avoidance and illegal tax evasion is the thickness of a prison wall. Now, that’s what I call scary.