Be Prepared: Capital Gain Taxes Incoming

Capital Gains Tax (CGT) was once a concern largely sidestepped by most investors, especially those with portfolios safely inside pensions and ISAs.

Historically generous allowances meant that only a fraction of individuals needed to pay close attention to this tax.

However, the shifting tax landscape has expanded the reach of CGT significantly, making it increasingly relevant for almost anyone with investments outside of these tax-efficient wrappers.

No longer a tax for the 'select few,' CGT is rapidly becoming a mainstream issue that demands your attention.

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Last summer, HMRC released their annual CGT update. The figures for 2021/22 revealed that total CGT liabilities hit £16.7bn, a 15.2% increase compared to the previous year. This figure has nearly doubled since the 2015/16 tax year. The number of individual taxpayers affected also surged by over 20%.

This rising trend is rooted in several key policy changes:

• Replacing Entrepreneur's Relief with Business Assets Disposal Relief in the March 2020 Budget.

• Freezing the annual exempt amount despite high inflation rates.

• Taxpayers' pre-emptive actions due to fears of tax rate hikes, sparked by a CGT review in July 2020.

In the Autumn Statement 2022, the Chancellor tightened the screws on CGT even further by:

• Lowering the annual exempt amount to £6,000 for the current tax year, and to £3,000 from 2024/25.

• Scrapping the index-linking provision for the exempt amount.

• Freezing the higher rate income tax threshold at £50,270 until 5 April 2028, indirectly affecting CGT rates for higher-income earners.

HMRC estimates that by 2024/25, these changes could impact up to 570,000 individuals and trusts, with 260,000 facing CGT for the first time.

Strategies for the New CGT Landscape

With next year's £3,000 annual exempt amount looming, it's high time to reassess your investment strategies. Here are some tactics to consider:

• Leverage Your ISAs: Previously minor tax benefits of ISAs now become substantial. If you have cash ISAs, consider converting them to stocks and shares ISAs.

• Smart Use of Exemptions: Although you can't sell and immediately rebuy a holding to realise a gain, other options remain viable (see advanced strategies below).

• Optimise Ownership Between Partners: If you're married or in a civil partnership, each of you has an individual annual exemption. By pooling these exemptions, you can realise more gains tax-free.

• Delay the Sale: Currently, no CGT applies upon death, but be aware of the potential inheritance tax implications.

Advanced Strategies: Beyond "Bed and Breakfasting"

The practice of "Bed and Breakfasting" involves selling shares only to repurchase them shortly after, aiming to lock in gains while lowering Capital Gains Tax (CGT) liabilities. However, effective from 17 March 1998, this tactic no longer delivers the tax benefits it once did. Current identification rules stipulate that shares sold and repurchased within a 30-day window are treated as matching, negating any gains or losses that might have otherwise resulted from shares previously held. This 30-day rule is applicable for taxpayers who sell and then reacquire shares of the same type in the same company within this period.

However, alternatives exist:

• Sector Swapping: After selling, buy shares in a similar market sector but avoid repurchasing the exact same shares.

• Bed and Spousing: One partner sells while the other buys similar shares, taking advantage of each one's annual exemption.

• Bed and SIPP or Bed and ISA: Trigger the necessary gains or losses by selling shares, but essentially maintain ownership through a tax-efficient structure like a SIPP or ISA.

Take Action Now

Even a modest investment of £20,000 with a 2% annual growth can result in CGT liabilities. Don't be blindsided by this evolving form of wealth tax.