Chancellor Rachel Reeves announced an astonishing £40 billion of tax rises in her maiden budget, and yet, despite that, there will be relief in some quarters that things didn’t turn out worse.

Capital gains tax is one of the areas where the Reeves’ raid was not as bad as feared, as there had been speculation she would bring capital gains tax rates into line with income tax, with the top rate rising to 45%.

As it stands, she left gains on residential properties untouched, increased the basic rate of capital gains tax from 10% to 18%, and the higher rate from 20% to 24%. These changes came in immediately, so any assets sold from now on are subject to the higher rates.

In and of themselves these changes might not have caused too much distress, were it not for the fact that the annual tax-free CGT allowance has been dramatically scaled back in recent years, from £12,300 to just £3,000.

What are the new rates of CGT?

Basic rate: Up from 10% to 18%

Higher rate: Up from 20% to 24%

This leaves investors with annual gains above this amount potentially liable to capital gains tax, unless they take action to protect their profits. There are a number of ways of doing this, but the most obvious is to use tax shelters.

ISAS AND PENSIONS

Investments in both ISAs and pensions can grow free from capital gains tax, and so these tax shelters should be the first port of call for investors hoping for some chunky growth in their portfolio.

Dividends also grow free from income tax within these wrappers. Those who hold unwrapped investments can perform a manoeuvre called a ‘Bed and ISA’ or ‘Bed and SIPP’ to move them inside the protective walls of these tax shelters. This does involve selling assets so there is potentially a capital gains tax liability at this point, though investors can mitigate this by judicious use of their annual £3,000 CGT allowance.

Those who think they might breach the £3,000 allowance using this approach could consider pairing the sale of a profitable investment with a loss-making one.

Losses can be used to offset gains, thereby reducing the capital gains tax liability, then either or both investments can be repurchased within the ISA or pension.

BUDDY UP ON TAX

Assets can also be transferred to a spouse or civil partner free of capital gains tax, and by doing so investors can utilise two lots of the annual £3,000 CGT allowance on profitable share sales.

By doing a ‘Bed and Spouse and ISA’, it’s also possible to then use two lots of the annual ISA allowance of £20,000 to shelter those assets from future capital gains.

For higher-rate taxpayers, there may also be some merit in transferring assets to a spouse even where the gain exceeds the annual CGT allowance of £3,000 if they are a basic-rate taxpayer.

By increasing the rate of capital gains tax for basic-rate taxpayers more than higher rate taxpayers, the chancellor has narrowed the value of this ploy, but it might still mean paying capital gains tax at 18% rather than 24%.

In this scenario, capital gains are added to your income and can push basic-rate taxpayers into the higher band, so it pays to exercise due care and attention when working out how much to transfer.

VCTs, EIS and SEIS

Wealthy, adventurous investors who have filled their pension and ISA allowances and still have money to invest might consider much more risky tax shelters such as VCTs, EIS and SEIS, which come with attractive tax perks.

Among these, capital gains on investments held within both VCTs and EIS are free from tax, and in addition EIS and SEIS schemes allow deferral of, or partial exemption from, the tax made on capital gains made elsewhere.

However, investors should ensure they don’t let the tail wag the investment dog by taking more risk than they’re comfortable with simply to save tax.

VCTs and EIS invest in small, early stage companies which might fail and have low levels of liquidity, so investors must have plenty of other funds to fall back on, as well as a high tolerance for losses.

SWITCHING SOLUTIONS

Capital gains tax doesn’t just cause a problem for those who are calling it quits on their investments and cashing them all in.

Investors who are rebalancing their portfolios, taking profits or moving between investment ideas also face capital gains tax when they sell to reinvest elsewhere.

Again, it’s important not to let the tax tail wag the investment dog, but there are steps you can take to mitigate this, if you wish.

Rather than running stock portfolios themselves, investors could invest in funds and investment trusts.

Capital gains tax on these is due when the investors sells the fund or trust, however the manager can make changes to portfolio companies within the fund or trust without paying capital gains tax.

Even fund investors may want to sell out from time to time, again for rebalancing purposes, or because a fund manager has left or is underperforming.

Capital gains tax is unfortunately blind to these fairly routine reasons for selling holdings, so investors might also consider turning to multi-asset funds, which include a mixture of shares, bonds, cash, property and other assets.

They come in a variety of risk profiles, so investors can pick one which suits them for the long term.

Changes between different asset classes, funds and shares are again made within the multi-asset fund free from CGT, which is only payable by investors when they sell the multi-asset fund itself.

Many people like running their own portfolios, so this isn’t for everyone, but if you’re happy taking a hands-off approach, multi-asset funds might be worth a look.

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