The Changing World of CGT

Tax efficient income planning for individuals is a key aspect of most financial advisers’ propositions for their clients. The continuous changes in government legislation make this aspect of the role increasingly more difficult, creating a moving target on how to achieve the best client outcomes over the longer term.

This challenge is particularly prevalent with the recent reduction in the Capital Gains Tax (CGT) exemption from £12,300 to £6,000 on the 6th of April 2023. Whilst a 50%+ reduction seems difficult enough, a further 50% reduction to £3,000 on the 6th of April 2024 provides a further obstacle.

The Office for Budget Responsibility has estimated that in the 2023-2024 tax year, capital gains tax will raise £17.8 billion in receipts which is the equivalent to £620 per household. These trends indicate that this number will only grow with time. With these changes and the lack of awareness around CGT in general, it becomes more apparent why professional financial advice is crucial now more than ever.

Discretionary Fund Managers – increased headache or stress reliever?
Many IFAs use DFM services to decrease the management stress of their clients’ funds both in the active and passive landscapes. As every DFM will have a different process for managing their client assets, the CGT implication will vary between each provider. It may lead to questions regarding the implications on the end client and what tax may arise in rebalancing.

Timeline’s drift approach allows clients to benefit from positive movements in the equity markets without worrying about timescales influencing rebalances. Whilst managing tax for clients is extremely important, it is almost impossible to completely mitigate out. It’s also worth considering that with the constantly changing rules surrounding tax rates, the underlying CGT legislation may well have changed by the time it comes to a rebalance.

Some Potential Solutions:

• Interspousal transfers: Shares can be passed between spouses without tax implications to use both exemptions and can help mitigate tax between the couple.
• EIS/SEIS Investments: High-risk investments that can help defer or even relieve capital gains.
• Loss Management: Using declared losses in previous tax years to offset gains in future years.
• Death and rebasing: CGT is rebased on death meaning that when an individual dies with a CGT-heavy portfolio, the value on death will become the new base.

Changes in Legislation
The recent reduction in the annual exemption has been speculated to be a preamble to the government fully dissolving the CGT allowances for individuals. Previous government reports have also recommended raising CGT tax rates in line with income tax, which would void the benefits of holding investments such as Unit Trusts due to their current favourable tax rate. These two scenarios have been proposed under the Conservative regime; leading more extreme proposals to emerge from the Labour camp should they gain power in the next election.

Whilst all speculation, it is clear change in this space will be frequent in the coming years. During this time, it will be vital for individuals in all stages of their lives to seek financial advice, so they are not met with unexpected and unaffordable tax bills.

Download Timeline's full paper on CGT here