The investing trick to protect against Labour's capital gains tax grab (and you've only got 40 days to use it!) warns JEFF PRESTRIDGE
Warning signs: Jeff Prestridge predicts a rise in capital gains tax in next month's Budget - but says investors can protect against it
If there is one tax that Labour will ramp up in next month’s Budget, my money is on capital gains tax.
So if you are the owner of a business, buy-to-let property or have assembled an investment portfolio to see you through to retirement and beyond, you need to be aware of what could be coming your way.
In short, a far nastier tax regime when it comes to realising gains from these assets – with tax charges potentially double those that currently apply.
Few people, apart from those wealthy enough to employ expensive tax consultants, will be able to escape its claws, with the Budget only 40 working days away.
However vicious this assault may be, it ticks all of Labour’s boxes.
For a start, the party deplores the idea of people profiting financially from anything beyond work, especially when those gains are taxed more lightly than employment income – as capital gains tax (CGT) currently is.
So as far as Labour is concerned, hitting individuals with higher taxes on such ‘unearned’ income is a no-brainer.
It would also allow the Government to claim in the Autumn Budget – somewhat dubiously, I must say – that CGT hikes are not a tax on working people.
Throughout the General Election campaign, Sir Keir Starmer waffled on about this commitment, which was built around not increasing rates of income tax, National Insurance contributions and VAT.
But many working people have investments or own an income-generating buy-to-let property. Hiking capital gains tax rates will certainly constitute a tax rise for these people, albeit only when they come to sell.
Although the Prime Minister and his financial lieutenant Rachel Reeves (pictured) have yet to confirm that a ramping up in CGT is coming our way, it's as obvious as night follows day
Why Labour could raise capital gains tax
Although the Prime Minister and his financial lieutenant Rachel Reeves have yet to confirm that a ramping up in CGT is coming our way, it’s as obvious as night follows day.
Calls for a more onerous CGT reform have been long-standing.
In late 2020, the now defunct Office Of Tax Simplification published a report arguing that the ‘disparity’ in rates between income tax and CGT led to decision-making which was not always in the best interests of the economy.
Gianpaolo Mantini, a chartered financial planner at wealth manager Saltus, says this report could now be ‘easily used’ by Labour to justify a more punishing CGT regime.
In recent days a Left-leaning think-tank, the Institute For Public Policy Research (IPPR), has also had its two pennyworth, arguing that the current tax system would frustrate Labour’s grand ambition to rebalance the country.
It says the system perpetuates regional inequalities – put crudely, that it favours people who live in the South East and disadvantages those in the North.
The solution? Several reforms are suggested, but the big one is equalising CGT rates with those on income.
It would be a big surprise if Chancellor Rachel Reeves didn’t include this tax move in her Budget on October 30.
So how might the CGT regime change – and, more importantly, can you mitigate its effect?
You can if you act quickly.
Where are we now with capital gains tax?
Capital gains tax is charged on the profits made from the sale of various assets.
These include investments, big-ticket personal possessions such as paintings and jewellery, second homes and buy-to-let properties, your own business – even cryptocurrency.
Cars and main homes fall outside the CGT net (for the time being – anything is possible with this Labour Government).
For sales of shares, unit trusts and personal possessions, basic rate taxpayers typically pay 10 per cent (sometimes more) on their gains.
Higher-rate and additional-rate taxpayers pay 20 per cent. For property sales, CGT rates are higher, at 18 per cent and 24 per cent respectively.
The only concession is that £3,000 worth of capital gains can be ‘crystallised’ in the current tax year, making it free of CGT.
> How capital gains tax works: Read our guide to tax on profits
How a capital gains tax raid could take shape?
It is unlikely the £3,000 annual capital gains tax-free allowance will be trimmed in the Budget, although stranger things have happened in the past.
Under the previous Conservative government, the allowance took a severe haircut, from £12,300 in the tax year ending April 5, 2023, to £3,000 now.
So my money is on it staying at £3,000 – its lowest level since the early 1980s.
What is more likely is for Ms Reeves to adopt the IPPR idea and align CGT rates with income tax rates.
So for basic rate taxpayers it would mean a 20 per cent minimum tax charge, while for higher and additional-rate taxpayers they would pay 40 per cent and 45 per cent respectively on gains above the £3,000 tax-free allowance.
How a CGT rise could eat your returns?
The effect of such a change capital gains tax change is best illustrated in pounds and pence.
Take someone who, in the current tax year, has taxable income (after all allowable deductions and their personal allowance) of £30,000.
This means their income is below the upper limit of the basic rate income tax band of £37,700 (add the £12,570 personal allowance and you get to the £50,270 higher rate tax threshold). Income tax rates in Scotland are slightly different.
Let us then say they crystallise a £20,000 gain from the sale of shares. For CGT purposes, the taxable gain is £17,000 (£20,000 minus the £3,000 tax-free allowance).
Currently the CGT charge is 10 per cent on £7,700 of the gain (the remainder of the investor’s basic rate income tax band) with the rest (£9,300) charged at 20per cent as it moves up into the higher rate tax band. The total CGT bill is £2,630, a tax rate of 15.5 per cent.
But if Labour heeds the IPPR’s advice and aligns CGT rates with income tax rates, the CGT bill would become £5,260 – a doubling of the effective rate on their return to 31 per cent.
Painful, very painful… but not all is lost.
During the election, Sir Keir Starmer - here with Rachel Reeves - waffled on about commitments and Labour claim CGT hikes are not a tax on working people
How to mitigate the impact of a CGT hike
If the Chancellor increases CGT rates in the Budget, there is a big chance they could come in straight away.
It’s a transactional tax, so there is no need for her to wait until the new tax year on April 6.
Although buy-to-let owners can do little between now and the Budget to avoid higher CGT rates (other than hang on to their properties until CGT rates possibly come down under a future government), investors have options – especially if they hold shares outside of tax-friendly individual savings accounts (Isas) and pensions.
If you sit in this camp, you could take £3,000 of investment profits between now and the Budget, escaping CGT altogether (provided you haven’t taken any gains earlier in the tax year).
You could simply bank the proceeds – or you could sell the shares and then buy them back, resetting their purchase cost for future CGT assessment.
If you do this, you must wait at least 30 days before buying back the shares.
But an even better approach is to sell shares with gains under the £3,000 annual tax-free allowance, and then buy them back in a stocks and shares Isa where future profits are free from CGT (and, just as importantly, future dividends are protected from dividend tax).
The provider of your Isa should do all the hard work for you.
With these so-called ‘bed and Isa’ transactions, the 30-day rule does not apply – although the repurchase will attract a trading fee and 0.5 per cent stamp duty.
The amount going into the Isa will count towards your annual Isa allowance of £20,000.
Investing platform Interactive Investor says ‘bed and Isa’ transactions by clients increased by 99 per cent in the three months to the end of August, compared with the same quarter in 2022.
Myron Jobson, personal finance analyst at the platform, says: ‘The threat of a less generous CGT regime has provided the impetus for many customers to shift their investments into their stocks and shares Isa via “bed and Isa” – shielding their future gains and dividends from the clutches of the taxman.’
In a similar fashion, investments can be sold with gains under the £3,000 tax-free allowance and then bought back in a self-invested personal pension, again protecting future gains from CGT.
The only drawback, as Susannah Streeter of Hargreaves Lansdown points out, is that you can’t access your pension until age 55 (this will rise to 57 in April 2028).
And don't forget your spouse
If you’re married or in a civil partnership, it could be wise to sit down with your other half and – with CGT in mind – work out who should hold any investments.
Dividing investment portfolios – using an interspousal transfer – means two annual tax-free allowances can be used to protect crystallised share gains from CGT.
It also means the lower-rate taxpayer can reduce any CGT bill on gains exceeding their annual tax-free allowance. Again, your broker or investing platform can do all the hard work – for a small charge.
Finally, it goes without saying, that now is the time to fill your boots with Isas.
As Jason Hollands, investment expert at Evelyn Partners says, Isas should be ‘investors’ first port of call’ – with pensions not far behind.
Compare the best DIY investing platforms and stocks & shares Isas
Investing online is simple, cheap and can be done from your computer, tablet or phone at a time and place that suits you.
When it comes to choosing a DIY investing platform, stocks & shares Isa or a general investing account, the range of options might seem overwhelming.
Every provider has a slightly different offering, charging more or less for trading or holding shares and giving access to a different range of stocks, funds and investment trusts.
When weighing up the right one for you, it's important to to look at the service that it offers, along with administration charges and dealing fees, plus any other extra costs.
To help you compare the best investment accounts, we've crunched the facts and pulled together a comprehensive guide to choosing the best and cheapest investing account for you.
We highlight the main players in the table below but would advise doing your own research and considering the points in our full guide linked here.
>> This is Money's full guide to the best investing platforms and Isas
Platforms featured below are independently selected by This is Money’s specialist journalists. If you open an account using links which have an asterisk, This is Money will earn an affiliate commission. We do not allow this to affect our editorial independence.
| Admin charge | Charges notes | Fund dealing | Standard share, trust, ETF dealing | Regular investing | Dividend reinvestment | ||
|---|---|---|---|---|---|---|---|
| AJ Bell* | 0.25% | Max £3.50 per month for shares, trusts, ETFs. | £1.50 | £5 | £1.50 | £1.50 per deal | More details |
| Bestinvest* | 0.40% (0.2% for ready made portfolios) | Account fee cut to 0.2% for ready made investments | Free | £4.95 | Free for funds | Free for income funds | More details |
| Charles Stanley Direct* | 0.35% | No platform fee on shares if a trade in that month and annual max of £240 | Free | £11.50 | n/a | n/a | More details |
| Fidelity* | 0.35% on funds | £7.50 per month up to £25,000 or 0.35% with regular savings plan. | Free | £7.50 | Free funds £1.50 shares, trusts ETFs | £1.50 | More details |
| Hargreaves Lansdown* | 0.45% | Capped at £45 for shares, trusts, ETFs | Free | £11.95 | £1.50 | 1% (£1 min, £10 max) | More details |
| Interactive Investor* | £4.99 per month under £50k, £11.99 above, £10 extra for Sipp | Free trade worth £3.99 per month (does not apply to £4.99 plan) | £3.99 | £3.99 | Free | £0.99 | More details |
| iWeb | £100 one-off fee (waived until Dec 2024) | £5 | £5 | n/a | 2%, max £5 | More details | |
| Accounts that have some limits but attractive offers | |||||||
| Etoro* No investment funds or Sipp | Free | Investment account offers stocks and ETFs. Beware high risk CFDs. | Not available | Free | n/a | n/a | More details |
| Trading 212* | Free | Investment account offers stocks and ETFs. Beware high risk CFDs. | Not available | Free | n/a | Free | More details |
| Freetrade* No investment funds | Basic account free, Standard with Isa £5.99, Plus £11.99 | Freetrade Plus with more investments and Sipp is £9.99/month inc. Isa fee | No funds | Free | n/a | n/a | More details |
| Vanguard Only Vanguard's own products | 0.15% | Only Vanguard funds | Free | Free only Vanguard ETFs | Free | n/a | More details |
| (Source: ThisisMoney.co.uk July 2024. Admin % charge may be levied monthly or quarterly | |||||||
