Author: Gary King
Chartered Financial Planner
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Published: November 2024
An increase in Capital Gains Tax (CGT) rates was announced in the Budget on 30 October. The lower CGT rate rose from 10% to 18%, and the higher rate increased from 20% to 24%, effective immediately. Notably, these changes did not impact CGT rates on residential properties, which remain at 18% and 24%, respectively.
The increase to CGT rates was not as harsh as many had expected. There had, for example, been some speculation that rates could be aligned to those for income tax, so 20% (basic rate); 40% (higher rate) and 45% (additional rate).
In terms of limiting the impact of CGT, the key considerations remain largely unchanged following the Budget, namely:
- Make use of your annual CGT exemption. You get an annual CGT exemption of £3,000 (known as your Annual Exempt Amount or AEA). You won’t pay CGT so long as you stay within the £3,000 exemption. You cannot roll over any unused CGT allowance from previous years, so it is a case of ‘use it or lose it’.
- Ensure that you make use of your tax efficient savings allowances each tax year. The ISA allowance remains £20,000 and the pension contribution limit 100% of income, subject to a cap of £60,000 (subject to taper rules for ‘high earners’).
- Allocating more high-growth investments to tax-advantaged accounts such as ISAs and pensions helps shield gains from CGT.
- Contributing to a pension may also move you into a lower tax bracket which means you pay a lower rate of CGT.
- Onshore and offshore investment bonds are generally underutilised as tax-wrappers. Investment bonds have a different tax treatment to the rest of the product wrapper suite, including ISAs, pensions and direct investment through what is commonly referred to as a General Investment Account or GIA. Investment bonds are subject to different tax considerations as they fall under the ‘chargeable event’ regime.
- Be aware of losses on any assets that you hold. Losses can continue to be used to offset gains in the same tax year. The rule on carrying forward losses also remains unchanged – they can be carried forward and used to offset gains realised in future tax years.
- Transfers between spouses or civil partners remain exempt from CGT, offering an avenue to share gains and potentially make use of each partner’s CGT allowance. This is especially useful for couples with differing tax rates, allowing gains to be realised in the hands of the lower-rate taxpayer where possible.
While tax considerations are essential as part of planning, allowing tax to override sound investment decisions can be counterproductive. The principle of “not letting the tax tail wag the investment dog” remains crucial. This is that investment decisions should be based primarily on financial goals and risk tolerance, rather than letting tax implications dictate decisions entirely. For some, triggering CGT may be inevitable to ensure the ongoing suitability of their portfolio, particularly in terms of maintaining an appropriate level of risk.
Other key changes announced in the Budget were around Inheritance Tax (IHT), specifically in relation to pensions and Business Property Relief (BPR) / Agricultural Property Relief (APR). From 6 April 2027 the value of your pension funds when you die will be added up with your other assets to calculate whether your estate will pay IHT. From 6 April 2026, the full 100% relief from IHT will be restricted to the first £1 million of combined agricultural and business property.
The Chancellor claimed that the £1m 100% band would help protect small farms. However, £1m is likely to be insufficiently generous for even the smallest of farms, meaning that practically all farmers can now expect to be subject to inheritance tax IHT on their deaths – this has recently become known as ‘tractor tax’. It is widely expected that the changes to BPR / APR will impact a significantly greater number of people than the Government stated would be the case. However, until draft legislation is published, there will remain lack of clarity around the more technical details, both in relation to the changes in BPR / APR and the treatment of pension funds for IHT.
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Disclaimer
Opinions constitute our judgment as of this date and are subject to change without warning. The value of investments and the income from them can go down as well as up, and you may not recover the amount of your original investment.
The information in this article is not intended as an offer or solicitation to buy or sell securities or any other investment, nor does it constitute a personal recommendation.
The Financial Conduct Authority does not regulate estate planning and tax planning.
The information contained within this blog is based on our understanding of legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change.
