How can investors keep ahead of any Budget changes to Capital Gains Tax?

The forthcoming Autumn Budget will be one of the most anticipated of modern times. Given the unprecedented level of Government financial support under Covid-19, it’s clearly inevitable that tax rises must follow to claw back the growing deficit. But should they happen now, or should taxes be kept low to nurture an economic recovery from Covid-19 first? Also, given the Government election promise of no tax rises for Income Tax, VAT and NICs, which taxes will be targeted?

The Chancellor sent an open letter to the OTS in July to conduct a review of Capital Gains Tax (CGT), which many read as an indication that CGT changes could feature in the Budget. So what could CGT changes look like, and what can investors do to keep one step ahead of them?

Many speculate that the historically low rates of CGT might increase – the current rates of 10%/20% (lower/higher rate) and 28% (residential property) are significantly lower than their Income Tax counterparts of 20%/40%/45%. Those CGT rates are of course applicable after the deduction of the £12,300 CGT annual exemption.

March’s Spring Budget saw a reduction of the Business Asset Disposal Relief (formerly Entrepreneurs’ Relief) lifetime limit from £10m to £1m, and many speculate that business disposals might still be in the firing line. Changes were also made from April to further dilute Principal Private Residence relief, which applies when selling your home (or former home), but it would take a bold Chancellor to do away with that relief altogether.

Current predictions point towards an increase in CGT rates. Whether those rates mirror Income Tax levels remains a big question – my money would be on somewhere between the two, to keep business owners and investors engaged and maintain some tax advantages for those taking entrepreneurial risks and investing in businesses.

Also, would a change in CGT rates happen immediately from Budget date or be deferred until 6th April 2021? Nobody knows for sure, so it might be prudent to take some action before Budget date in case a CGT rate increase takes immediate effect. So what can investors consider doing before the Budget to take advantage of the current low rates?

Any sale of shares cannot be repurchased within 30 days under the “bed and breakfast” anti-avoidance rules, which means selling and immediately rebuying does not trigger the intended capital gain. You either need to wait the full 30 days (which could be risky with volatile stock markets) or look at other ways to repurchase those shares:

 

‘Bed and ISA’

ISA investments are not subject to tax, so considering moving £20,000 of investments into ISA funds. Sell shares now and repurchase those same shares in your ISA.

 

Make use of your spouse’s ISA

Married couples and Civil Partners can transfer shares between each other without triggering CGT, so transfer shares to your spouse to enable them to Bed and ISA as well – tapping into as two ISA allowances.

 

Use your pension allowance

A variation on ‘Bed and ISA’ is to sell shares and repurchase them in your pension fund. Contributing the sale proceeds into your pension fund to repurchase the shares has the added benefit of tax relief (increasing the amount available for the share purchase)

Depending on your earnings, up to £40,000 gross (more in certain cases) could be transferred into your pension to purchase the shares. With possible changes to pension tax relief also mooted for the Budget, this planning may have a double-benefit.

 

Swap capital growth for income

For those who have sizeable assets but lower incomes, it might be worth considering moving some your share portfolio from capital growth to income-generating investments. By replacing annual capital gains that exceed the annual exemption via share sales with increased dividend income, you could be paying less tax overall. Remember, the first £2,000 of dividend income is taxed at 0% (the Dividend Allowance) and the remainder can be taxed as low as 7.5% (if you have some Basic Rate band remaining).

As always, any planning involving share sales, ISA and pensions needs appropriate financial advice. Please speak with our Private Clients team for expert advice on tax and financial planning matters by emailing support@garbutt-elliott.co.uk.