Income tax, NI and VAT are the big three earners for HMRC – they generate nearly two-thirds of its tax revenue every year. However, ahead of the election, main parties insist they will not increase these taxes, despite the size of the national debt (albeit we spot a potential hidden 4p income tax hike – read our earlier article).
Will capital gains tax (CGT) be raised instead?
In a report released on Monday, the IMF urged governments to tax businesses and investors more.
It remains to be seen what the next government will do. However, should the rates of CGT be brought in line with income tax rates, it’s estimated this could secure HMRC an extra £8 million p.a. on top of what's currently projected.
Even without this, latest OBR figures show HMRC can expect CGT receipts to swell (from £14.8 billion in 2023/24 to £23.5 billion in 2028/29). This will be purely the result of growing asset prices combined with existing policy, such as your personal Capital Gains Tax-free allowance being cut from £12,300 to £3,000 in the past two years.
One way or the other, we could be feeling more of the taxman’s grip via CGT in the coming years.
What might experienced investors consider? How could you mitigate the impact of CGT on your investments, once you’ve used available allowances? This article explains briefly how you could potentially halve a CGT bill (SEIS) or make CGT-free investments.
Tax rules can change, and benefits depend on circumstances. This is a brief outline based on current rules: there are detailed conditions and rules you should consider carefully before investing. Decisions should be based on the investment merit, not the tax reliefs alone.
Important: The information on this website is for experienced investors. It is not a personal recommendation to invest. If you’re unsure, please seek advice. These investments are for the long term. They are high risk and can fall as well as rise in value: you could lose all the money you invest.
How you could potentially halve a CGT bill
In the past – for instance, in 1988 when Nigel Lawson announced the forthcoming increase of the CGT rate to 40% – many rushed to crystallise their historic gains ahead of the change. We might see something similar in the run up to the elections or if the winning party introduces any changes – nothing is known for sure.
Whether you already have a CGT liability, perhaps as a result of the decreased annual tax-free CGT allowance, or expect to have one in the near feature, there are ways to mitigate that.
An option experienced investors could consider is backing dynamic young companies under the Seed Enterprise Investment Scheme (SEIS). These businesses are among the smallest, youngest startups in the UK and HMRC offers investors generous CGT reliefs in recognition of the very high risks.
When you invest any portion of a gain in SEIS, you could reduce the CGT bill on that portion of the gain by up to 50%. You may use the relief on investments in the tax year of your investment, or the year before.
You can invest up to £200,000 per tax year. If the full £200k is invested tax efficiently you could currently receive:
- Up to £100k (50%) in income tax relief
- Up to £28k or £20k (50%) capital gains reinvestment relief, depending on the type of gain and when it was realised
Any growth is tax-free, the investment should also be IHT-free if held for two years and on death, and you could claim loss relief if things don’t go to plan. Please note: to use the CGT relief, you must have also claimed the income tax relief (up to 50%) in the same year.
How you could protect your investments from CGT
One of the most effective – and simplest – ways to protect your investments from CGT is to make full use of the yearly ISA allowance (currently £20,000). Once in an ISA, your money can grow free of UK income tax and capital gains tax.
If you are able to – and happy to lock your money away for longer – you could also consider maximising your pension contributions: any growth in your investments held in a pension is CGT-free.
Moreover, a pension contribution could potentially help reduce the rate of CGT you pay. CGT rates are currently linked to income tax rates. So, by paying more into your pension, you might be able to reduce your taxable income and consequently the amount of tax you pay on your capital gains.
Most UK resident under the age of 75 should be able to contribute as much as they earn to a pension, capped at £60,000. There are, however, some restrictions for higher earners, non-earners and those who’ve already started drawing a pension income. Pensions cannot normally be accessed until the age of 55 (57 from 2028). You should check before investing.
Two ready-made options for your ISA and pension
If you want to make the most of your ISA and SIPP allowance, we have two options for you to consider: the Wealth Club Portfolio Service and the Quality Shares Portfolio.
Both services are designed to help more experienced investors grow their wealth in the long term without the hassle of selecting your own investments (we do that for you).
The Wealth Club Portfolio Service offers five portfolios designed to provide experienced investors with a best-value, sensible long-term home for their wealth. They are the type of portfolio a private bank or wealth manager might build for you – but without the hefty price tag. In fact, you could pay around 40% less than you would if you used an adviser, and roughly the same as managing a typical fund portfolio yourself on a DIY platform.
The Quality Shares Portfolio, managed by Wealth Club Head of Equities Charlie Huggins, is specifically designed for people who are genuinely interested in investing. It invests in 15-20 global listed businesses chosen by Charlie for their resilience, financial strength and pricing power. As an investor, you receive an unparalleled level of information, insight and transparency.
Note: these discretionary managed portfolios are long-term investments which can fall as well as rise in value and returns are not guaranteed. You decide which portfolio is right for you but you do not receive advice.
Wealth Club aims to make it easier for experienced investors to find information on – and apply for – investments. You should base your investment decision on the offer documents and ensure you have read and fully understand them before investing. The information on this webpage is a marketing communication. It is not advice or a personal or research recommendation to buy any of the investments mentioned, nor does it include any opinion as to the present or future value or price of these investments. It does not satisfy legal requirements promoting investment research independence and is thus not subject to prohibitions on dealing ahead of its dissemination.