How could any changes to Capital Gains Tax affect your investment planning?

The King’s Speech on 17 July set out the new government’s legislative agenda.

The next big event in the parliamentary calendar is the Budget statement, which will be the first by a Labour chancellor since 2010.

Labour has previously said it would not deliver a Budget without it first being reviewed by the Office for Budget Responsibility (OBR).

It takes around 10 weeks for the OBR to assess the economic impact of a Budget and to produce its analysis. This means the earliest that the Budget could take place would be mid-September, even if the incoming government had all their detailed financial plans ready on day one.

So, with party conference season at the end of September, it’s more likely that the Budget will be delivered in mid-October, with most of the announced changes coming into effect at the start of the 2025/26 tax year.

As a result, it would make sound financial sense to start considering how any possible changes could affect your financial plan. Find out what this means for you, particularly with regard to Capital Gains Tax (CGT).

Beyond high-level tax commitments, other revenue raising measures are unclear

Labour has stated categorically that they will not increase National Insurance, the basic, higher, or additional rates of Income Tax, or VAT.

Additionally, the Party manifesto confirmed that they are “proud of being pro-business” and have ruled out any increase to Corporation Tax – currently 25% in 2024/25.

They have made it clear that growth will drive the economy, and the subsequent increase in tax receipts will help fund their spending commitments.

Clearly, this is a laudable aim, but the King’s Speech outlined over 30 new bills – most of which will require a financial commitment – and it begs the question: where will the money come from to cover the cost of new public spending measures?

It’s likely you have seen a lot of speculation about changes to Capital Gains Tax (CGT) being a likely way for the new government to raise revenue. Indeed, the lack of any specific Labour assurances regarding CGT other than ruling out applying it to primary residences, has probably resulted in you feeling uncertain about any effect on your investment portfolio.

Equalising Capital Gains Tax and Income Tax is a possible change

For the 2024/25 tax year, if you are a basic-rate taxpayer, CGT is charged at the rate of either 10% or 18% for property sales that are not your main residence. For higher and additional-rate taxpayers the respective rates are 20% and 24%.

The previous Conservative government reduced the amount you can draw without being subject to CGT, known as your “Annual Exempt Amount”, from £12,500 in 2022/23 to just £3,000 in 2024/25. This means that couple, who previously had a combined exemption of £25,000 now only have £6,000 between them.

The previous government also removed the CGT indexation allowance for individuals from 1 January 2018 which means that you  can potentially end up being taxed on capital gains arising purely as a result of inflation.

A lot of the speculation suggests that Labour could equalise CGT with your applicable marginal Income Tax rate. There is a precedent for this as the Conservative chancellor, Nigel Lawson, did the same in 1988.

If so, that would double the CGT rate for higher-rate taxpayers to 40% and by even more for additional-rate payers to 45%.

Furthermore, you may also see changes to the special lower rate you can enjoy if you sell your business and apply for Business Asset Disposal Relief (BADR). In this case, you can benefit from the lower 10% rate up to a lifetime limit of £1 million.

The government may also consider changing Capital Gains Tax rules on death

Another CGT-related area that the government may review relates to the taxation of gains on assets you hold on your death.

At present, any capital gains you have accrued when you die are removed when those assets pass to your nominated beneficiary. Those assets are then deemed to have been acquired at their current value.

You should be aware, however, that Inheritance Tax (IHT) may be payable if the beneficiary isn’t your spouse.

It’s possible that the new government could create a new “double whammy” by amending the rules so that CGT would be levied on your uncrystallised gains over your lifetime, with IHT being charged where applicable.

You can bring forward losses to reduce any Capital Gains Tax liability

Clearly, if you have substantial investment assets that you are used to drawing income from, any increase in the rate of CGT could be cause for concern. So, it could be sensible to reassess your financial planning strategy.

In the short term, to take advantage of current rates, you might want to consider crystallising previous investment losses now in advance of any potential changes, as you can offset losses to reduce your tax bill.

You have up to four tax years to report any losses to HMRC, but the losses can be carried forward indefinitely.

These losses will become increasingly useful if CGT rises because they will shield a greater portion of your investment gains from tax.

You could consider alternative investment options

The fear of a new Labour government equalising CGT and Income Tax has prompted one of our clients to act already.

He held a substantial offshore portfolio, denominated in US dollars. This meant that he had enjoyed significant currency gains (remember where the Sterling vs US$ exchange rate used to be pre-Brexit? as well as benefiting from the strong returns of global equities over the past 10 or so years.

The day after the July election, he decided to sell down his portfolio, accepting the 20% CGT charge on the bulk of it rather than run the risk of a far more substantial tax charge of up to 45% further down the road.

Such action might not be right for everyone, and was taken based on a number of very specific personal circumstances. If you are concerned about the potential effect of an increase to CGT, I would recommend you get expert advice before you restructure your assets.

There are alternative investment options, such as offshore bonds, that you could effectively utilise to mitigate the effects of higher rates of CGT on your investment and income strategy. This is achieved as investment gains within an offshore bond are rolled up and tax (bonds are subject to income tax) is not payable each year unless there is a ‘chargeable event’.

By adding additional lives assured such as your adult children, such bonds could also help to minimise the impact of CGT when you die, again through rolling up  gains. The chargeable event of death is usually the last life assured to die, which if you have included your children, could be many years after your own.

Careful tax planning and the use of allowances and previous losses can help reduce your CGT liability while you are alive and ensure more of your money is passed on to your loved ones on your death.

You can read more here: 5 important issues to consider if you’re thinking of investing in an offshore bond.

Get in touch

Any changes to CGT will make it imperative that you review and reassess your investment strategy, particularly if you are drawing a regular income from your portfolio and other assets.

If you would like to discuss your own arrangements, please get in touch.

You can contact us by email or, if you prefer to speak to us, you can reach us in the UK on +44 (0) 208 0044900 or in Hong Kong on +852 39039004.