One of the key measures announced in last week’s Budget was a hike in the rate of Capital Gains Tax (CGT) paid on disposal of investments. The move had been widely flagged by the media and commentators; however, predictions of a significant jump in the rate of CGT have proven to be wide of the mark.
With effect from 30th October, gains made on the disposal of investments will be subject to new rates of CGT, depending on the overall tax position of the individual making the gain. For those within the basic rate tax band, the rate of CGT has increased from 10% to 18% and for those in the higher and additional tax bands, the rate has increased from 20% to 24%. The new rates are aligned with the rates that already applied to the sale of residential property, which remain unchanged.
Not as bad as predicted
In the weeks leading up to the Budget statement, commentators were speculating that the rate of CGT could see a large increase, with predictions of rates between 30% and 40% being forecast. On the face of it, the new CGT rates are, therefore, not as painful for investors as could have been the case.
The annual exempt amount, i.e. the net gain an individual can make in a tax year without paying CGT, remains at £3,000, with 50% of the annual exempt amount being available to trustees. The exempt amount had already been reduced from £12,300 to £6,000 and again to £3,000 in previous Budget statements. Investors should look to make use of the annual CGT exemption each tax year, as unused exempt amounts cannot be carried forward to another tax year. When the net balance of gains and losses in a tax year creates an overall loss, the loss amount can be carried forward indefinitely and be used to offset gains above the annual exempt amount in the future, as long as the loss has been reported to HMRC.
It is also important to note that CGT is effectively wiped out on death, and thankfully the Budget did not contain any change to this rule, as this would, in effect, lead to the potential for estates to face double taxation. As investments held on death are uplifted to their value at probate, beneficiaries receive the assets with a new purchase cost equivalent to the probate value.
Time to review your portfolio
For those holding investments outside of a tax-efficient wrapper, such as an Individual Savings Account (ISA), the hike in CGT rate should be a clarion call for investors to review their existing investment portfolios and consider how they are structured. As gains made from disposals of assets within an ISA are exempt from CGT, the increased rate of CGT further enhances the benefit of holding assets within an ISA wrapper. Investments held within an ISA also benefit from exemption from Income Tax, too. The Budget statement confirmed that the ISA allowance will remain fixed at £20,000 per tax year for the remainder of the parliament, and this provides the opportunity for investors to use the annual ISA allowance going forward with a degree of confidence.
For those seeking to shelter funds from CGT, alternative investment wrappers, such as Investment Bonds, now look increasingly attractive. Gains on Investment Bonds are subject to Income Tax, and not Capital Gains Tax, and investors can freely change investments inside the
Bond wrapper without triggering a charge to CGT.
As a result of the increase to CGT rates on investment gains, it may be appropriate to review how your investments are structured, to see whether greater tax-efficiency can be achieved from a combination of ISA and Investment Bond wrappers, rather than standard General Investment Accounts.
Business owners see hike in rates from April
Business owners looking to dispose of business assets will also see higher rates of CGT applied from April 2025, although a relief that reduces the rate paid by a business owner on the sale of a business remains available.
Formerly known as Entrepreneur’s Relief, Business Asset Disposal Relief (BADR) allows business owners and sole traders to sell their business with lower rates of CGT applying on disposal. To qualify for BADR, the business owner needs to prove ownership throughout the two-year period prior to disposal or in the case of a shareholder, needs to be beneficially entitled to 5% of profits distributed on winding up of the company or 5% of the sale proceeds. BADR will continue to apply to the first £1m of qualifying gains during an individual’s lifetime, with gains above this level charged at the standard rate of CGT.
Until 5th April 2025, the current rate of CGT of just 10% will continue to apply to claims under BADR; however, this will increase to 14% from 6th April 2025 and 18% from 6th April 2026. Once the rate of CGT payable through BADR reaches this level, it will align with the CGT rate that applies to basic rate taxpayers. It does, however, still provide a small discount against the headline CGT rate of 24% that applies to higher rate taxpayers.
Planning Opportunities
The change to CGT rates should prompt investors to undertake a review of their existing investments to look for opportunities to reduce the potential tax liability in the future. Use of the annual ISA allowance, alternative structures such as Investment Bonds and other tax efficient investments, such as Venture Capital Trusts, can reduce an overall tax liability. For business owners looking to sell their business, higher rates of tax will apply from April; however, powerful tax planning tools remain available, such as the ability to make employer pension contributions, that could help achieve a more favourable outcome and reduce the overall tax burden.
Our expert advisers can provide independent advice on the options open to you. Speak to one of the team to start a conversation.
