What are you investing in to minimise your CGT bill? Share your strategy with us at money@telegraph.co.uk*.
In another hit to UK investors, the Prime Minister and the Chancellor are understood to be considering a proposal from Dale Vince, a major Labour donor, to bring capital gains tax (CGT) rates in line with income tax rates.
This could raise CGT rates as high as 45pc to fund a £20bn handout for the lowest earners, which Mr Vince said would be partly funded by £14bn from CGT receipts.
But Helen Miller, director of the Institute for Fiscal Studies, said the prospect of £14bn being raised was “highly uncertain and would depend on the exact nature of the reform”.
Labour is already set to introduce a 22pc tax on cash held in stocks and shares individual savings accounts (Isas), leaving investors increasingly exposed to the taxman.
Were the CGT changes to be introduced, it would mean a higher-rate taxpayer with £50,000 in capital gains outside a tax wrapper could face a bill of £18,800, up from £11,280 they’d pay under the current rates.
However, there are still plenty of ways to avoid the tax charge – as long as you pick your investments wisely.
Here, Telegraph Money breaks down how savers and investors can shield their assets from Labour’s potential CGT raid.
Dull but dependable investments
Gilts
Price gains on UK government bonds – known as gilts – are exempt from CGT. Therefore, for someone investing outside an Isa or pension, only the coupon would be subject to income tax, while the gain upon redemption of the gilt would be tax-free.
The coupon offered by a gilt is a regular fixed interest payment, which is paid in addition to the return of the original face value of the bond at maturity.
“Although the capital repayment is known if the gilt is held to maturity, its market value can fluctuate before then, should you need to sell,” said Jason Hollands, of wealth manager Evelyn Partners.
Tax-efficient wrappers and spouse transfers
While unique tax-efficient investments can help to reduce the CGT burden, savers’ first port of call should be to maximise existing tax wrappers.
Gains on capital invested in Isas and pensions are exempt from CGT, but asset allocation is important.
Therefore, placing high-growth assets, such as shares and funds in an Isa or self-invested personal pension (Sipp) allows gains to be shielded from the taxman.
Married couples and civil partners can transfer assets between one another without triggering a tax charge. This means that both spouses’ exemptions and Isa allowances can be utilised, which can reduce overall liability further if one spouse is subject to a lower rate of tax.
Finally, don’t forget each individual still has an annual CGT allowance, allowing for tax-free gains up to £3,000.
“Use your £3,000 CGT allowance every year. Banking small gains regularly resets your cost base and cuts the bill when you eventually sell,” said Darius McDermott, of Chelsea Financial Services.
Higher risk and niche investments
Venture capital trusts (VCTs), enterprise investment schemes (EIS) and seed enterprise investment schemes (SEIS) provide tax incentives to encourage investors to support fledgling UK companies or small start-ups.
Gains on VCTs and qualifying EIS and SEIS investments are free from CGT – but that’s not all. VCTs, EIS and SEIS offer 20pc, 30pc and 50pc income tax relief, respectively, provided you hold the shares for three years, or five years in the case of VCTs.
Individuals can invest up to £200,000 each year in VCTs or SEIS and up to £1m in EIS.
But, Rachael Griffin, a tax and financial planning expert at Quilter, warned that these structures “are not a free lunch”.
Because of the nature of their investment, “it means they have high growth potential, but they’re also high risk, so some of them will be huge successes and some will fail”, according to Sarah Coles, from the stockbroker AJ Bell.
Many VCTs also aim to return capital to shareholders via dividends, which mean that share price gains can be more muted.
