How does the reduction in CGT exemption affect your investments?

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The continued reduction of the Capital Gains Tax (CGT) exemption over the last few years could have significant implications for investors, with the annual exemption amount lowered from £12,300 to £6,000 in the 2023/24 tax year and then to £3,000 in 2024/25. Previously, individuals could realise gains up to £12,300 without incurring any CGT. With the exemption now at £3,000, more investors will find themselves liable for CGT on gains that would have previously been exempt.

The rate of CGT on chargeable assets is currently 10% for basic rates taxpayers and 20% for higher rate tax payers.

Impact on General Investment Accounts

The most obvious holding this will impact is a general investment account (GIA), also known as an open-ended investment company (OEIC), unit trust or collective investment. Those with an older account are likely to be impacted more due to the length of time the capital has been invested, leading to higher gains accrued over the years. 

What can be done?

Investors need to be strategic about when and how they realise gains to minimise any tax burden. The reduction in the CGT exemption makes the use of tax-efficient accounts, such as Individual Savings Accounts (ISAs) and pensions, even more critical. Gains realised within these accounts are not subject to CGT, making them an attractive option for investors looking to shelter their investments from tax. Maximising contributions to ISAs and pensions can help investors manage their tax liabilities more effectively.

Whilst advice to complete an annual transfer from your GIA to your ISA or pension stands true, it could be that the transferable amount is now limited or completed over a longer period of time. Market performance has seen a dip in annual performance over the last couple of years, but as we see a continued recovery, gains on holdings are beginning to increase. Effectively, this time last year it is likely that your fund value was lower, and the CGT exemption was higher, whereas this year the value is higher, and the exemption is lower.

The reduced CGT exemption may also influence your investment decisions. You might become more cautious about realising gains, opting instead to hold onto investments for longer periods, or as a legacy investment to leave to your loved ones in the event of your death.

Another option may be to reassess your current holdings and consider new options such on or offshore bonds. These holdings are still subject to tax but based on income rather than gains.

Is it worth paying an increased CGT liability?

There will be times when it makes sense to realise a gain and pay the tax, it’s not all negative, as any gain is a sign the portfolio has performed well. Realising a gain will allow you to consider the possibility of a new environment, the funds may remain in a GIA, but as mentioned, other options include ISAs and pensions, or onshore or offshore bonds where suitable. It may be worth considering a CGT budget, where some of the fund is sold rather than all of it. This could be particularly helpful if you have concerns about any future changes.

For example, an individual has held capital in a General Investment account since the early 2000s, with an accrued value of £150,000. This represents the majority of their investment portfolio, and having never moved any of this money to a tax free environment, their gains are now in the region of £60,000. Inclusive of the £3,000 CGT exemption allowance, the CGT tax bill (taxed at the higher 20% rate) will be £11,400.

In a case like this, good financial planning would always be to avoid letting the ‘tax tail wag the dog’ and consider moving the capital to a new environment in order to mitigate the risk of being overweight in a taxable environment. Selling the investment can allow for more effective management and increase the opportunity to meet long term goals and objectives.

There is speculation that the Chancellor Rachel Reeves may introduce changes to CGT in the upcoming budget. The Independent recently suggested she could equalise CGT in line with income tax bands, which would significantly increase the tax liability for those paying higher rates of tax.

Professional advice to help minimise tax liability

Given the complexities introduced by the reduced CGT exemption, seeking professional financial advice is more important than ever. Financial advisers can help investors navigate the new rules and optimise their tax strategies. They can also provide guidance on how to structure investments to minimise tax liabilities and take advantage of available allowances and reliefs. This means your portfolio can be proactively managed in accordance with changes to legislation.

It is also worth noting that with the lower CGT exemption, more investors will need to report their capital gains to HMRC. At Armstrong Watson, we are passionate about helping our clients with their finances, along with having a team of chartered financial advisers, we also have an inhouse tax team on hand.

Again, it is important to note that the changes to the rates of CGT are speculation. We will know more when the Chancellor delivers her first budget on October 30. Experts from Armstrong Watson’s accounting, tax and financial planning teams will be discussing the budget announcements in a live webinar on October 31.