Recent changes to Capital Gains Tax (CGT) have seen both the rate of tax increase and the annual exemption reduced.
The annual exemption dropped from £12,300 to £6,000 in the 2023/24 tax year and then to £3,000 in 2024/25. This means that previously where individuals could realise gains of up to £12,300 without incurring any CGT, now only £3,000 can be realised before a liability is due.
This has been compounded by an immediate increase in the rate of Capital Gains Tax, announced in the Autumn Budget. CGT has increased from 10% for basic rate taxpayers to 18%, and from 20% to 24% for higher rate tax payers for disposals made on or after 30th October 2024.
As a result of these changes more investors will find themselves liable for CGT on gains that would have previously been exempt, and for an amount higher than they previously would have paid.
Impact on investment accounts
If you hold your investments in a general investment account (GIA) which has a range of singular funds, any rebalance or fund change is subject to CGT. This means that you may have to pay tax or compromise your investment choices to not pay tax. 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 a longer period of time.
If, however, you hold your GIA investments in an OEIC (Open Ended Investment Company), the fund manager can make internal changes to the holdings without incurring CGT, so the investment decisions are not compromised by tax.
What can be done?
Investors who hold investments in this type of account need to be strategic about when and how they realise gains to minimise any tax burden. The reduction in the CGT exemption and the increase of rates makes the use of tax-efficient accounts, such as Individual Savings Accounts (ISAs), onshore bonds and pensions within the given annual allowances even more critical. ISAs offer an annual allowance of £20,000, while pensions offer up to £60,000, capped at your income. Gains realised within these accounts are not subject to CGT, making them an attractive option for investors looking to shelter their investments from increasing tax liabilities. Maximising contributions to these products can help investors manage their tax liabilities more effectively.
Whilst advice to complete an annual transfer from your GIA to your ISA or pension continues to stand true, it could be that the transferable amount is now limited or completed over a longer period of time. Annual market performance has seen a dip over the last couple of years, but as we continue to a recovery, gains on holdings are increasing. 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. It may, of course, be possible that some of your funds have lost value, these holdings can be sold and used to offset gains from other funds. This can be helpful and will offer slightly increased flexibility when calculating the overall gains.
Is it worth paying an increase CGT liability?
There will be times when it makes sense to realise a gain and pay the tax, but it doesn’t have to be 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, pensions and 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.
For example, an individual has held capital in a GIA 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 24% rate) will be £13,680.
In a case like this, good financial planning will 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.
Professional advice to help minimise tax liability
Given the complexities introduced by the above changes, 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.
