How to shield your wealth from a Labour capital gains tax raid
Investors have rushed to sell assets in a bid to sidestep punishing capital gains changes in less than two weeks which will cut tax breaks in half.
Savers are also jittery at the prospect of a new Labour government, after it emerged this week the party was considering a large increase in capital gains tax (CGT) if it wins the next election.
Financial advisers said they were helping clients sell off investments and make the most of more lenient rules before changes take effect in less than one week.
From April 6 the threshold at which capital gains are taxed will more than half from £12,300 to £6,000, and fall again to £3,000 from April 2024, as part of a multi-billion pound tax grab revealed in last year’s Autumn Statement.
Investors can sell assets to trigger capital gains in this tax year and make the most of their £12,300 allowance and buy them back at a later date, although it must be after at least 30 days.
Andy Butcher, of the private bank Raymond James, said he had been advising clients over the past couple of tax years to sell off investments in chunks and gradually pay tax to take advantage of historically low tax rates of 20pc.
Labour backbenchers have suggested increasing rates in line with income tax, meaning the current rate could double to 40pc for a higher earner under a future Labour government.
“Previous years we get a fair number of people who aren’t interested in crystallising gains to pay tax, but this year we have had very little pushback,” Mr Butcher said. “When the allowance drops to £3,000 it will be pretty damaging for a lot of people and it won’t just be those classed as rich who are caught.”
Any gains over the allowance are taxed at up to 20pc for investments and 28pc for residential property.
Felix Milton, a financial adviser in Barnstaple, said his clients had been selling investments and shielding the funds in Isas to avoid higher tax bills next year.
"A client this week asked to sell some of their shares in aerospace company BAE Systems so as not to fall foul of the lower tax-free allowance next month. The shares were valued at just over £37,000, of which roughly £20,000 was a gain, and under the current rules he did not have any CGT liability because, held jointly with his wife, of a joint allowance of £24,600," he said.
“However, with the changes from April they will only be able to benefit from £12,300 in tax free gains combined.
“If no action was taken and they wanted to sell the shares, they would have to pay a tax bill of £760 in the new tax year as basic rate taxpayers. The clients disposed of a sufficient sum now so they can still hold the shares in the new tax year, but ensuring any future gains will be within their joint allowance,” he added.
Mr Milton said a number of landlord clients who were considering selling properties in the coming years had expedited the sale to make the most of the higher allowance while it lasts.
Landlords who own properties in limited companies will not be affected by the CGT changes as they pay corporation tax on their sale profits.
The current rush to sell assets will surge if the likelihood of Labour winning the next general election increases, experts said, pointing to a spike in asset disposals when Jeremy Corbyn fought in the 2019 general election.
Samuel Mather-Holgate, of advice firm Mather and Murray Financial, said: “Although the Tories have been harsh with the reduction of the CGT allowance, it is thought Labour might offer a more generous allowance, but a higher tax rate making it much more expensive for those who have significant gains.”
How can I reduce my CGT bill?
Despite diminishing allowances and the threat of an even bigger tax grab on the horizon, there are several options for investors to keep more of their gains.
One of the easiest solutions is to ensure the full tax-free allowance is used each year, because it cannot be applied retrospectively, carried forward or transferred to a spouse.
Nimesh Shah, of accountants Blick Rothenberg, advised a tactic known as “bed and breakfasting” to help make the most of the full annual exemption. This involves selling shares either side of a new tax year to crystallise a capital gain.
Mr Shah added: “The tax rules to calculate capital gains mean you cannot repurchase the same shares within 30 days, but you could use your spouse or an Isa to purchase the shares and legitimately circumvent the 30-day rule.
“Capital losses can also be offset against capital gains arising in the same tax year, and any excess losses can be carried forward.”
Investors would need to make a claim for capital losses, usually through a self-assessment tax return, and there is a four-year time limit. Capital losses from the 2018-19 tax year need to be claimed by April 5 this year.
Investments in certain tax wrappers such as Isas and offshore bonds are not subject to CGT. Investors in Enterprise Investment Schemes, a type of high-risk venture capital investment, can also apply for a number of tax breaks, including up to 30pc income tax relief.
Mr Shah said: “It is possible to defer capital gains into the EIS investment, but this decision should be carefully considered as the capital gains will be revived when the investment is sold and taxed at the rate at the time.
“So this could be higher than the current CGT rate. Also capital gains on the sale of the EIS investment will be exempt from CGT only if certain qualifying conditions are met, including broadly holding the shares for three years.”
Anyone selling property should consider private residence relief, the most lucrative tax break for taxpayers between 2021 and 2022 which saved them £37.3bn in capital gains tax. Under this relief homeowners pay no tax on any profits made when selling their main home, as opposed to buy-to-let properties.