Investors are already selling assets such as property and investments because they anticipate more punitive capital gains tax (CGT) rates in the next year. CGT is often called the “forgotten tax” but it generates almost £10billion a year for HM Revenue & Customs, and that is set to surge.
This is almost double the £5.4billion it took from inheritance tax last year, yet many fail to realise the danger.
The Treasury’s CGT receipts hit £9.8billion in the 2019/20 tax year, up fourfold from just £2.5billion a decade earlier.
They are set to rise even higher after the Chancellor froze the annual CGT allowance at £12,300 until 2026 in his March Budget, a move that will suck more people into the net, and worse could follow.
Tax specialists are urging savers and investors who likely to make a capital gain to start planning well in advance to reduce their exposure, as Sunak could hike CGT rates in his Autumn Statement or March 2022 Budget.
Alan Harvey, financial planner at wealth manager Brewin Dolphin, said it is a case of when – rather than if – the Government decides to hike CGT. “Clients are already contacting us to navigate the potential impact.”
You risk a CGT bill when you sell assets at a profit, including shares and other investments held outside of a tax-free Isa, as well as paintings, antiques and jewellery, and property other than your main home.
Currently, basic rate taxpayers pay CGT at 10 percent, rising to 20 percent for higher-rate taxpayers.
Some will be liable to pay a higher CGT rate when selling an investment property or second home, of 10 percent and 28 percent respectively.
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Many suspect that Sunak will synchronise CGT rates with income tax, which could see some taxpayers paying a punitive 40 or 45 percent.
Harvey said taking action today could save thousands tomorrow. “Some clients are happy to pay CGT on property or investment sales now rather than in a year or two, when rates are likely to be higher.”
Spreading CGT bills over two or three taxes could reduce the cost, by making full use of your £12,300 annual exemption, Harvey said.
This could allow couples to bank £24,600 of gains without paying CGT.
Jason Hollands, managing director of Tilney Investment Management Services, said married couples and civil partners can transfer assets between themselves free of CGT, to double up their exemptions. “You can further reduce CGT by shifting assets into the name of whichever partner pays a lower tax rate.”
Hollands said the CGT threat makes it even more important to invest inside your £20,000 tax-free Isa allowance, where all returns are free of income tax and CGT. “You could sell non-Isa shares or funds then repurchase them within an Isa, to protect future gains.”
More sophisticated investors should check out the Enterprise Investment Scheme, where share gains are free of CGT if held for at least three years. “Tax planning is complex, so consider advice,” Hollands said.