Investors were always going to face higher taxes in Labour’s first Budget. For weeks now, the Government has been warning us of the unpleasantness to come – now in just ten days’ time.
Sir Keir Starmer has cautioned that the Budget will be ‘painful’ and make ‘big asks’ of the public. And he threatened that those with the ‘broadest shoulders should bear the heavier burden’ – and there’s not a world in which investors will be excluded from that camp.
But finally last week some detail started to emerge over just how badly hit investors could be.
Here’s what we know so far – and what it could mean for your portfolio in a best-case scenario – and if the Chancellor Rachel Reeves pulls no punches.
What we know so far
Investors will almost certainly be taxed more on their profits in the form of capital gains tax (CGT).
CGT is paid by investors when they make a profit selling valuable possessions such as jewellery or paintings, shares or properties that are not their main home.
At the moment, basic-rate taxpayers pay 18 per cent on gains made when selling property, and 10 per cent on gains from other assets such as shares.
Last week some detail started to emerge over just how badly investors could be hit in Chancellor Rachel Reeves’s Budget
Higher rate taxpayers pay rates of 28 per cent on property and 20 per cent on other assets. Increasing these rates would be the easiest way to increase the tax haul, but until last week we had little idea about how far the Government could go.
The first clue came on Monday, when Keir Starmer was asked if capital gains tax could be hiked as high as 39 per cent. ‘It’s getting to the area which is wide of the mark,’ he said.
The second clue came on Thursday, when reports indicated that the Chancellor Rachel Reeves had ruled out increasing CGT on property sales of second homes.
Phew. A big relief for landlords and second homeowners – and no great loss to the Treasury either.
In fact, figures from the Office for Budget Responsibility suggest that increasing the rate on second homes would actually reduce the tax haul because it would put owners off buying and selling.
In any case only 12 per cent of capital gains tax collected is from property – more than half comes from the sale of shares.
The news was not so positive for investors: the Chancellor has reportedly determined that she will increase CGT on profits made on shares.
How much will investors pay?
There had been fears that the Chancellor would align CGT rates with income rates, which would mean doubling the rate that investors pay
Armed with this information, we can start to piece together how much more tax investors will have to stump up.
Firstly, any investments held within a pension or Isa wrapper are completely protected from capital gains tax so won’t be affected by any hike.
Secondly, investors are permitted to make £3,000 in profit every year from selling shares outside of tax-free wrappers – without paying CGT.
The Government could choose to lower – or even remove this limit, but that would be pretty extreme. The allowance has already been hacked to pieces – falling from £6,000 last year and £12,300 the year before. Extreme, but sadly not impossible.
Investors who make a profit on shares held outside of a tax-free wrapper – and that exceeds £3,000 in a tax year – will face higher capital gains.
There had been fears that the Chancellor would follow the recommendation of think tank the Institute for Fiscal Studies and align CGT rates with income rates. That would mean doubling the rate that investors pay.
But as Sir Keir Starmer has suggested 39 per cent is wide of the mark, a lower increase looks more likely.
One option that could start to look to the Chancellor like a Goldilocks-style sweet spot, would be to raise the rates for share sales to the same rate for residential property. This is currently 18 per cent for basic and 28 per cent for higher-rate taxpayers. Such a move, she could argue, would reduce complexity, increase the tax haul and keep tax on second home owners unchanged while increasing it for stock market investors.
Wealth and Personal Finance has asked wealth managers Evelyn Partners to crunch the numbers to see what this could mean for your portfolio.
We asked it to consider three options. Option one – (very wishful thinking) – she leaves things unchanged. Option two – she brings capital gains tax rates for shares up to the same level as property. Option three – she does option two and gets rid of the annual allowance. The calculations show that it is basic rate taxpayers who would see the biggest leap.
But as Sir Keir Starmer has suggested 39 per cent is wide of the mark, a lower increase looks more likely
At the moment a basic rate taxpayer making a gain of £10,000 would pay a minimum of £700 in CGT. If CGT on shares was levelled with that on property, they would pay at least £1,260 – an extra £560. Higher and additional rate taxpayers facing the same change would pay an additional £280 – a total of £1,680.
If the annual allowance was scrapped as well, basic rate taxpayers would pay more than double the amount of CGT that they currently do – a minimum of £1,800 on a gain of £10,000.
Higher and additional rate taxpayers would pay £2,400 – in other words an extra £1,000.
So how can you protect yourself?
The key is to think things through carefully and not make rash decisions that you will later regret. Calculate what – if any – capital gains liabilities you may have. You may find that once you have made use of your Isa and current allowance that it is non-existent or minimal and therefore unlikely to be severely impacted by a CGT rise.
But, remember there is nothing to stop the Chancellor bringing in changes overnight (former Chancellor George Osborne did in 2010), so it may be worth thinking through now if you can.
When it comes to protecting yourself from CGT, Isas are your best friend.
If you have not already used your full £20,000 Isa allowance, you could sell shares with gains under your current £3,000 tax-free allowance and then buy them back within an Isa. Once in an Isa, all interest, dividends and capital gains earned are free of tax.
If you hold your shares with an investment platform – the likes of AJ Bell, Interactive Investor, Hargreaves Lansdown or Fidelity – they should manage this process – known as ‘bed and Isa’ – for you. But you’ll have to get a wiggle on.
If you have used up your Isa allowance, there may still be benefit in selling shares with gains up to the value of your CGT allowance and then buying them back again outside of an Isa. That way you reset the purchase cost for future CGT assessment.
However, you must wait at least 30 days before buying back the shares – and at a time of heightened market volatility this is not without risks. Do your research and think carefully before acting.
Another option is to transfer investments to your spouse as this will not incur capital gains tax.
If your spouse hasn’t used up their tax-free allowance or Isa allowance and you have, you could shift investments to them.
AJ Bell pensions and savings expert Charlene Young warns: ‘You just need to make sure you keep a note of the original cost of the asset, as that’s what will be used when your partner comes to sell it.’ She adds that there is another advantage if your partner is a basic and you’re a higher or additional rate taxpayer as the current rules mean they would pay capital gains at a lower rate.
Another option is to use investment losses made in the current tax year to offset any gains before you deduct your tax-free allowance. You can also carry forward losses to offset against gains in future tax years if you haven’t used them already.
If your spouse hasn’t used up their Isa allowance and you have, you could shift investments to them. AJ Bell’s Charlene Young recommends keeping a note of the original cost of the asset
A third handy trick is to use pension contributions to reduce your income tax band. When you pay into your pension, it has the effect of extending your basic rate tax band. If you’ve only just tipped over into being a higher or additional rate taxpayer, you may be able to pull yourself down below the threshold again by paying into your pension.
That would mean that you could pay capital gains at a lower rate.
‘This planning tool works under the current system, but if CGT rates are equalised it would cease to be of benefit,’ adds Young.
Remember that the Chancellor may have other tricks up her sleeve to increase her take from investors. For example, your CGT liability currently dies with you, but she could make it payable on your death if it hasn’t been paid in your lifetime.
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