Of all the unpleasant personal finance measures announced in the Chancellor’s high-spending, high-tax Budget, the one that took most experts by surprise was the increase in capital gains tax (CGT) on sales of actions.
Not the increases themselves (talkative Treasury officials had made it widely known before the budget that rates would rise), but the fact that they were implemented immediately.
It means that anyone selling shares must do so now mindful of the fact that the old CGT regime no longer exists. Finite. New higher rates now apply.
So instead of investment gains being taxed at a minimum of 10 per cent for basic rate taxpayers and 20 per cent for higher and additional rate taxpayers, they will now be subject to respective rates of 18 per cent. cent and 24 percent.
Fortunately, the first £3,000 of earnings accrued in any tax year – the presumably so-called “annual exempt amount” – remains (thanks Rachel Reeves).
According to the Office of Budget Responsibility, the new rates will generate very little additional revenue for the Chancellor’s fund in the current fiscal year. But by the time the 2029 tax year has run its course, it will generate around £2.5bn (helped by CGT income from some other sources).
However, for the majority of you who are currently on an investment journey – or are about to embark on one – there is no reason why you should fall into this CGT trap. Through judicious use of estate tax wrappers and smart reorganization of investments, you can even avoid it altogether.
Think how good that would feel: a portfolio of wealth immune to Reeves’ fiscal clutches. This is how you do it…
Eat, sleep and breathe ISAS
An Individual Savings Account (Isa) is a wrapper that allows you to build a tax-free investment fortress.
This means there is no CGT on profits made on investments held within the tax-free envelope, whether they are UK shares, international shares, unit trusts or investment trusts. There is also no tax on dividends generated by investments. Additionally, and most importantly, Isas withdrawals are tax-free.
You should consider an Isa as a personal tax haven, a supplement to a pension. So whenever you invest from now on, perhaps because of an investment article you read in this newspaper, I urge you to always follow the Isa path. Think of Isa.
If you already have an investment (stocks and shares) Isa, use it; Don’t invest outside of it unless you’ve already used up your £20,000 annual allowance.
If you don’t have an investment Isa and want to build wealth over the long term, create one.
It’s easy to do online – leading providers include AJ Bell, Fidelity, Hargreaves Lansdown and Interactive Investor. Most banks offer these too and you can usually get details at a local branch and online.
As mentioned, the rules allow you to contribute up to £20,000 in the current tax year to an Isa. If you’re married or in a civil partnership, that’s £40,000 between you – doubly generous. Although you should always be skeptical of what politicians say, Ms Reeves stated in her budget that the £20,000 annual Isa grant will remain in place until April 2030.
Think of that in terms of cash. Including this tax year, it gives you the opportunity to save a maximum of £120,000 into an Isa between now and April 2030 – £240,000 per married couple. That gives you plenty of room to protect your wealth from taxes. If finances allow, take advantage.
And don’t forget investment Isas for your children. You can invest up to £9,000 a year in a so-called Junior Isa (Jisa) until your son or daughter turns 18; Family members can also deposit money into the account.
The tax exemptions are the same: no income tax or CGT. And Mrs Reeves has also promised to maintain this £9,000 annual allowance until April 2030.
Just a warning: unlike an adult Isa, a Jisa cannot be accessed until you are 18 years old.
Other anti-CGT measures…
If you hold investments outside of an Isa, CGT won’t become an issue until you decide to get rid of them.
You may want to keep your portfolio intact, perhaps in the hope that in the future a new government can introduce a more benign CGT regime with
a higher annual exemption (it was £12,000 in 2019).
But nothing is stopping you from gradually reducing your portfolio’s exposure to CGT.
For example, you could use your exemption to get £3,000 of tax-free profits each year.
Alternatively, you could sell £3,000 worth of shares and then, through a process called a ‘bed & Isa’, buy them back into your Isa. By doing this you don’t pay CGT on the sale (the bed) whilst moving the shares into a CGT free wrapper. Your Isa provider will do this for you. Just keep in mind that the transaction
must be within your permitted allowance of £20,000.
You can also do the same with a personal pension that you have invested yourself (bed and board).
Move assets
Finally, if you are married or have a civil partnership, make sure any investments you hold outside of Isas and pensions are held to your best overall tax advantage.
For example, you can transfer shares to your spouse without triggering a tax charge. By making this “spousal transfer”, two annual CGT exemptions will be available to you.
Transferring shares to the partner who is a lower rate taxpayer also means less tax payable on future capital gains over £3,000 – 18 per cent instead of 24 per cent. Your broker or investment platform should be able to help you with the transfer of shares.
Yes, dear reader, with a little planning, your investment journey can avoid the dangers of CGT. How glorious that will be!
- jeff.prestridge@dailymail.co.uk
Some links in this article may be affiliate links. If you click on them, we may earn a small commission. That helps us fund This Is Money and keep it free to use. We do not write articles to promote products. We do not allow any commercial relationship to affect our editorial independence.