Six key steps to protect your investments before the Labour budget
With a Labour budget on the horizon, investors are understandably concerned about possible changes to tax legislation that could impact their portfolios. One of the most significant rumours circulating is that Capital Gains Tax (CGT) rates might be equalised with Income Tax rates. This could mean a substantial increase in the amount of tax you pay on profits from your investments.
We have already seen a severe reduction in the CGT annual exempt amount (the amount of gain one can realise without paying any tax) from £12,300 per individual in 2022/23, to £3,000 now, in 2024/25. Whereas historically higher exempt amounts allowed for the management of CGT, this will no longer be possible for all but the smallest portfolios and paying (some) CGT will become a fact of life for many. With this in mind, using the remaining allowances available to you is more important than ever.
Here’s what you should know and the steps you should consider taking before any changes come into effect.
29th August 2024
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Tom Parry See profile
The first and most crucial step is to speak with your financial adviser to revisit the structure of your affairs. A professional can help assess the potential impact of any tax changes on your portfolio and suggest strategies to mitigate any adverse effects. Your adviser will be up to date with the latest policy discussions and can provide tailored advice based on your unique circumstances.
If you’re worried about how potential changes might affect your long-term financial security, a cashflow planning exercise will provide peace of mind. This process helps you understand your financial future and assess whether you can afford to spend more freely or withdraw funds from your investments.
For example, if you are confident you won’t run out of money, you might feel more comfortable withdrawing funds from your investments now while the CGT rates are known – even if that means paying some tax. You can use these proceeds to make meaningful memories or even gift funds to children or family members, potentially reducing your taxable estate.
Individual Savings Accounts (ISAs) offer a tax-efficient way to save and invest. Given the potential rise in CGT rates, now might be the perfect time to maximise your ISA contributions. Profits generated within an ISA are free from CGT, making them an attractive option if you’re concerned about potential tax hikes.
If you’ve completed a cashflow planning exercise (above) and determined that you have available funds to gift, you can potentially fund ISA and/or Junior ISA for loved ones, too.
A ‘Bed & ISA’ strategy involves selling investments held outside of an ISA and immediately repurchasing them within an ISA. The term comes from the previous practice of ‘Bed & Breakfasting’; this was where an investor could sell their investments on day one to crystalise a gain, usually within the allowance of the time, stay out of the market overnight (a one night stay, just like being in a Bed & Breakfast) and then re-purchase the same investments with a re-based purchase price on day two. The rules have since been amended and Bed & Breakfasting is no longer effective for tax, but the name persists. And a Bed & ISA is effective for tax planning.
A Bed & ISA strategy can help reset the purchase cost of the investment while sheltering future gains from CGT. It’s a tactic worth considering, particularly if you’re sitting on significant unrealised gains that could be exposed to higher taxes in the future.
It’s good practice to use your ISA allowance each year, so if you have invested funds held outside an ISA you may wish to do so before the budget announcement.
If you’re married or in a civil partnership, you might consider a ‘Bed & Spouse’ strategy. This involves transferring assets between spouses to utilise both parties’ annual CGT allowances or rebase the purchase cost of the investment. This strategy can be particularly effective if one partner is in a lower tax bracket, as it could result in a lower overall tax bill.
If you hold investments directly it is possible to hold many of the same investments inside a pension. Now is an opportunity to sell existing investments at the current rates of CGT, and reinvest in a pension, and/or to make use of your pension allowance from excess funds.
Investments inside a pension are free from CGT, and overall, a pension is even more tax efficient than an ISA. You can potentially fund a pension and/or Junior pension for loved ones, too.
The only drawback (for younger investors) is the access age of pension investments is currently 55, increasing to 57.
Whilst extremely tax efficient, the rules around funding a pension are myriad, so it is vital you take financial advice before investing to ensure you don’t inadvertently trigger an unexpected tax charge. See point 1, above.
Remember, any strategy can be complex and involve risks, so they should not be implemented without professional guidance. Proactive planning now could help you avoid a hefty tax bill later and give you greater confidence in your financial future.
If you want to discuss this further, feel free to get in touch, click here….