Investment - Articles - Four key options for investors concerned about CGT

Capital gains tax (CGT) is one such option, which applies to profits made on investments and assets held outside tax-protected wrappers like ISAs and pensions.

Gary Smith, Senior Client Partner at Evelyn Partners, says: 'At this stage we don't know what measures will be in the forthcoming Budget and it is important to make financial decisions based on facts, not speculation. What we do know is that CGT is a tax that has seen several changes in recent years under different Governments, which have made it crucial to manage a CGT liability effectively.'

Under the previous, Conservative government, the annual CGT exemption was reduced from £12,300 in the 2022/23 tax year to just £3,000 currently. Additionally, the rates of CGT were increased at the Autumn 2024 Budget from 10 per cent to 18 per cent (for basic rate taxpayers) and from 20 per cent to 24 per cent (higher and additional rate).

‘When the rates of CGT were increased at the October 2024 Budget they went up with immediate effect on the day, because the Treasury is well aware that CGT is in many instances an elective tax, and investors can either bring forward or delay the disposal of assets in order to swerve higher rates of tax.

‘Because expectations mounted through 2024 that CGT would be raised at the Budget, we saw widespread disposals of assets in the months before to take advantage of existing CGT rates. The latest CGT statistics showed that tax liabilities surged nearly 90 per cent in 2024/25.

‘In many cases, this was a sensible strategy for investors because many would have been sitting on profits built up over several years (often referred to as "pregnant gains"), and they would be using up their annual exemption to realise a portion of those profits without paying too much tax. Or perhaps they moved investments into tax-protected wrappers such as ISAs.

‘Even if CGT rates had not been raised at that Budget, the steps that we advised many clients to take beforehand were sensible and beneficial. And that could apply to many investors today, whether or not they are concerned about what might be the Budget.’

‘The forgotten allowance’
‘The annual CGT exemption is often referred to as "the forgotten allowance" among financial planning experts because it frequently remains unutilised, even among experienced investors.

‘Many people let their exemption expire each tax-year end. One probable reason behind this is that the timing of capital gains tax is often a matter of choice, and most people don’t want to sell successful investments or deal with CGT issues on their tax return until they really have to. Unfortunately, this means that pregnant gains can build up on investments that appreciate over time, leading to a higher tax liability down the line.

‘This will be especially the case for many investors in equities and equity funds today, who will be sitting on significant paper profits thanks to the huge gains in global markets of recent years.

‘The annual CGT exemption is 'use it or lose it' one, and very often for people sitting on long-term gains, it can be advisable to chip away at their tax liability by realising some profits each year. This way, they are not landed with one big tax bill when they come to sell the whole holding at once, with only one year’s CGT exemption available to set their profits against.

‘Now that CGT rates have increased to 18 per cent and 24 per cent, investors have more reason to consider seeking a bit of tax relief each year by realising a portion of their gains, although at £3,000, the annual exemption restricts the scope for this.’

1. Protecting against CGT by sheltering investments
‘Because the CGT exemption has been reduced to £3,000, this means that investors could now be exposed to a CGT liability on quite modest portfolios, especially as stock market returns have been strong in recent years.

‘To manage this reduction in the CGT allowance, you may want to consider using your annual ISA allowance of £20,000, as all returns within these accounts are tax-free and there is no tax to pay when you withdraw funds. 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.

‘Investors should note that this procedure – often referred to as "Bed & ISA" - can take some time, anything from a few days up to a couple of weeks depending on the investments held and the efficiency of the platforms being used. The key point is the date at which the gain is crystallised: in October 2024, investors who sold the day before the Budget were exposed to a lower rate than those who did so after.

‘It's also important to consider using your pension allowances to transfer some tax-exposed investments, as investments held within a pension are free of CGT, although you will not be able to access them until your normal minimum pension age [2], and only 25 per cent of the value of your pot can be withdrawn tax-free (subject to a maximum amount of £268,275).

‘Other products to consider include investment bonds (onshore and offshore), as you can buy and sell funds within these tax wrappers without any capital gains being realised, with gains only payable when capital is withdrawn.

‘A further consideration would be to invest in a fund-of-funds rather than a portfolio of direct funds, as changes within a fund structure don’t realise capital gains, and you can control how much to withdraw from the fund-of-funds to try and remain within the CGT allowance. In contrast, if you invest in direct funds or stocks and shares, every time you make a switch or trade, capital gains or losses will be realised.’

Other assets
‘Don’t forget that it is not just your investments that will be subject to CGT. CGT is also payable on other assets, such as second homes, buy-to-let properties, or holiday lets. Therefore, if you are going to sell a property during a tax year, consider not selling investments that would also realise gains during that same tax year, or sell those that would realise a capital loss (see below) to reduce the amount of CGT payable on the sale of the property.’

2. Reduce CGT by using your annual exemption
‘Many people amass portfolios of funds, investment trusts, shares, and/or investment properties outside of ISAs and pensions, all of which are potentially liable to CGT. However, assets only become assessable to CGT when a disposal event occurs, such as the sale of the asset or its transfer to anyone other than your husband, wife or civil partner.

‘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.

‘With careful planning, part of a portfolio could be sold to fully utilise the annual CGT allowance – whether or not the investments are then repurchased. If they are repurchased, the base cost used in the CGT calculation will essentially be reset to a new higher level, thereby reducing potential CGT liabilities in the future.

‘If an investor were to use their CGT exemption each year, and assuming a continuity in current tax rate and exemptions, then a portfolio of £100,000 achieving a net growth rate of 3 per cent per annum over 20 years could be valued at £175,000 at the end of the term, with a capital gain of only £15,000. On the other hand, an investor in the same scenario who chooses not to utilise their CGT allowance each year would have a capital gain of £75,000 on encashment.

‘CGT is currently chargeable at 18 per cent for gains falling within a person’s available basic rate income tax band and 24 per cent for higher rate and additional rate taxpayers. This is in comparison to income tax at 20 per cent, 40 per cent, or even 45 per cent. Investments subject to CGT rather than income tax are therefore attractive for people with no personal income tax allowance remaining.

‘For those wishing to crystallise a gain for CGT purposes, the proceeds must not be reinvested before a period of 30 days has elapsed, which may mean being out of the market. They could immediately reinvest into an alternative asset, but this may not always be appropriate.’

3. Interspousal transfers
‘You can transfer assets to other people, but if the transfer is to someone other than your husband, wife or civil partner, this will be a disposal for CGT purposes. The ability for spouses to transfer assets between them without triggering CGT can be useful.

‘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 subsequently sell that asset in the market. 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.’

4. Previous capital losses
‘If you sell assets that result in a capital loss, you are able to carry these forward for an indefinite period of time and use them to reduce the tax that could be payable during periods when you sell assets that have increased in value.

‘For example: 

 

‘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.’