Speculation that the government may look at increasing capital gains tax at the upcoming Budget has intensified this week after chancellor John Healey warned there is little room for manoeuvre in the country’s purse strings.
After HMRC statistics showed the government raked in some £24.2bn from CGT in the 2024/25 tax year (up 89% on the previous year), some suggest the tax could be on the agenda next month.
This has been a common rumour preceding Budgets, as the Labour Party manifesto promised not to touch the trio of income tax, National Insurance and VAT but said nothing of CGT.
One option mooted is to equalise capital gains with income tax. This would increase the current bands from 18% for basic-rate taxpayers and 24% for both higher and additional earners to 20%, 40% and 45% respectively.
This is on top of the reduction to the tax-free allowance that has already taken place. Since 2023, the amount people can make before paying capital gains tax has dropped from £12,300 to just £3,000.
Adrian Murphy, chief executive of Murphy Wealth, said making changes to CGT is “one of the very few viable options available to the chancellor to raise any money” but warned that bringing the tax in line with income tax would be “catastrophic”.
In particular, he said this could undermine the progress made on encouraging more people to invest, an area he argued the government has been making some headway in.
“Applying income tax rates to capital gains could undermine all that hard work, putting in place another disincentive for people to invest their money if it sits outside an ISA,” he said.
“Studies have shown that if capital gains tax is raised high enough, people simply stop selling their assets. The exchequer may receive a short-term boost as people realise gains before the tax rate increases, but beyond that the reality is most will hold onto their assets instead of selling them.”
This was backed up by Dan Coatsworth, head of markets at AJ Bell, who said CGT rumours could encourage some investors to bring forward plans to sell investments held outside ISAs and pensions.
“The strongest incentive to realise gains would be among investors who hold assets outside ISAs and pensions, have gains substantially above the £3,000 annual allowance, were already considering selling in the next year or two, and have significant exposure to long-term winners,” he said.
Gary Smith, senior client partner in financial planning at wealth management firm Evelyn Partners, highlighted four things people can do to bring down their CGT bill.
Transfers
For investors, the first option is to shelter their assets in tax wrappers, such as ISAs and pensions. This is paramount for even those with moderate portfolios, as the £3,000 allowance does not cover much and markets have performed well, so the likelihood of owing tax is higher.
“If you have any ISA allowance available, it is possible to sell investments and repurchase them in an ISA, although this could necessitate using up some or all of your annual CGT exemption,” he said.
However, this process, known as a ‘Bed & ISA’, can take some time. In some cases, it can take several weeks, depending on the investments held.
Pensions should also be considered, while other options include onshore and offshore investment bonds, as people can buy and sell funds within these tax wrappers without any capital gains being realised, with gains only payable when capital is withdrawn, he said.
If not transferring to a tax wrapper, another option is to use interspousal transfers, which allow people to move their assets to a husband, wife or civil partner.
“For instance, if a wife decides to gift an asset to her husband, that transfer would be exempt from CGT. The husband could then decide to sell that asset in the market,” said Smith.
“If the husband had remaining annual CGT allowance or pays CGT at a lower rate, that could have the effect of reducing the overall tax payable by the couple compared to the wife selling the asset in the market.”
Planning ahead
Outside of transferring money, Smith noted that there are some financial planning tips that can help to avoid large CGT bills. The first is to use the full exemption of £3,000 each year, selling off assets to bring down the taxable pot.
“Unless a disposal takes place, the annual allowance is never called upon, nor can it be carried forward to future years – so it effectively becomes a valuable benefit lost. As a result, many investors incur sizeable tax liabilities when they eventually come to sell or transfer long-held assets to children,” he said.
Another planning tool to remember is to declare previous capital losses. If assets are sold at a loss, a person is able to carry these forward to reduce a future tax bill.
For example, someone who sold part of their portfolio in 2022 at a £5,000 loss would be able to use this against a CGT bill today.
“In order to use previous losses, this must be recorded with HMRC, and that means you need to disclose losses on your annual tax return,” he noted.