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Rachel Reeves announced an increase in capital gains tax for small investors, increasing tax on stocks and shares to match the higher rates currently paid on property.
Setting out the new rules in his long-awaited Autumn Budget, Reeves said capital gains tax would rise from 20 per cent to 24 per cent for those paying higher tax rates.
But it was basic rate taxpayers who faced the biggest hit, as their capital gains tax rates will soar from 10 per cent to 18 per cent.
We look at what capital gains tax is and what the changes mean for investors.
Tax increases: Chancellor Rachel Reeves has increased capital gains tax rates in line with current property tax rates
What is capital gains tax?
Capital gains tax, known as CGT, applies to gains on assets including stocks and shares, second homes, buy-to-let and some personal possessions.
There is an annual tax-free capital gains allowance of £3,000 and tax is charged on gains above this. Losses on the sale of investments can be deducted from gains on others.
Although capital gains tax is separate from income tax, the rates are decided by individual income tax bands and the gains 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 paid 20 per cent.
As of today, rates have increased, with basic rate taxpayers now paying 18 per cent capital gains tax and higher and additional rate taxpayers charging 24 per cent.
These higher rates already existed for second home and buy-to-let gains, at 18 per cent for basic rate taxpayers and 24 per cent for higher and additional rate taxpayers.
Therefore, today’s changes mainly affect those who invest in the stock market.
There is a separate fee for entrepreneurs selling businesses. Business asset disposal relief means they pay 10 per cent tax on profits of up to £1m. This will also cause rates to rise, but not immediately. Employers’ 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 applies to and how much you pay
Why has Labor increased capital gains tax?
The move comes as part of Labour’s pledge to plug an alleged £22bn “black hole” in the country’s finances and was announced alongside a series of other tax rises.
According to Reeves, the increase in capital gains will raise up to £2.5bn to help tackle the deficit.
> How to protect your wealth from the Labor budget tax raid
When will the capital gains tax changes take effect?
According to the Treasury, the new capital gains rates will come into effect from today, October 30, and not in the new fiscal year.
There are reasons for capital gains tax increases to occur immediately. Conservative chancellor George Osborne raised the tax in 2010, with the increase being instituted from midnight after the budget.
This is to prevent asset sell-offs ahead of the new rules.
SIMON LAMBERT: This is a tax raid on small investors
Money’s Simon Lambert says: ‘Rachel Reeves has imposed a sharp rise in capital gains tax on investors’ profits.
‘Capital gains tax has not traditionally been an issue for many small investors as the annual tax-free allowance was reasonably generous at £12,300.
‘Unfortunately, that situation changed dramatically after Jeremy Hunt reduced the annual capital gains tax-free allowance to just £3,000.
“This means that Rachel Reeves’ increases have the potential to hit Britain’s army of small investors who have long-term shareholdings built up through job-sharing savings schemes and old certificate holdings, which are unlikely to be protected by a Isa wrapper”.
“Their decision highlights how important it is to take advantage of stocks and shares Isas when investing, which protect against tax on profits and dividends.”
> How to find the best and cheapest stocks and shares Isa
Who will be affected by the CGT increase?
The Government said it is “ensuring the UK tax system remains internationally competitive, with overall rates lower than those in France, Germany and Italy”.
He added that less than one percent of adults pay the tax each year. HMRC data shows 369,000 paid capital gains tax in the 2022/2023 tax year, with income rising to £14.4 billion.
However, those figures refer to a time when capital gains tax relief was more than four times greater than it is now.
The tax-free allowance was previously cut under the Conservative government from £12,300 to its current £3,000.
Sarah Coles, personal finance director at Hargreaves Lansdown, said: “Talking about things like capital gains tax as ‘wealth taxes’ obscures the fact that many middle-income people, who have invested carefully throughout their life, they may face a tax bill when they rebalance their portfolio or sell it to cover their costs later in life.
“The £3,000 annual allowance does not go very far when selling an investment that has been held for 30 years or more, so investors should consider how to protect themselves.”
He added: ‘Investors also need to face the fact that frozen income tax thresholds have pushed more people to pay higher tax rates, automatically raising their capital gains tax rate. A combination of all these things means that more people will have to pay more of this tax.”
Former chancellor Jeremy Hunt cut tax-free allowances for investments
The move, according to Görkem Barron of Lubbock Fine Wealth Management, could also reduce investment in stocks.
He said: ‘Such a large increase in CGT will hit private investors – it discourages investing in shares. “There is a real danger that this will erode the culture of share ownership in the UK.”
‘There is a particular risk that capital growth-oriented stocks – especially in the UK technology sector – will be hardest hit. Smaller UK tech stocks benefit hugely from retail investment, and the Chancellor has now made technology investment much less attractive.
Simon Merchant, chief executive of savings platform Flagstone, agreed: “Investors must now choose which investments to keep and which to divest to minimize the impact of a higher CGT liability in the future.” 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 reduce your CGT bill?
Using tax-friendly investment wrappers can go a long way toward reducing or eliminating capital gains tax liability. For many investors, the £20,000 Isa grant and £60,000 pension grant can cover the majority of their investments.
Investors should also consider taking full advantage of their £3,000 annual capital gains tax relief, which could shift investments into Isas.
Interactive Investor’s Myron Jobson said: “The double whammy of sharp cuts to CGT allowances in April and rising CGT rates provides additional impetus for investors to do what they should already be doing: make the most of tax-efficient wrappers such as Isas and pensions, which protect profits and income generated by investments from tax.’
Some investments are free of capital gains tax and may prove more popular.
Chris Rudden, head of UK investment consultants at digital wealth manager Moneyfarm, said: “It is more important than ever for investors to strategically manage their wealth to minimize the impact.”
He added that investors should “consider investments in government bonds, which are exempt from CGT, which may be a prudent measure.” It is also worth exploring the option of “locking” earnings at current rates before the new rates come into effect, thereby establishing a higher base for future calculations.
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