What the Autumn Budget capital gains tax changes mean for investors

The question around capital gains tax (CGT) in the lead up to the Budget wasn’t whether the rate was going to be increased or not, but how much it would be increased by. The Chancellor lived up to these expectations, announcing an increase to the rates of CGT effective immediately.

However, the increase was not as severe as some had worried it would be, with one option being widely circulated that we would see CGT rates aligned with income tax rates. While Reeves didn’t go that far, the new CGT rules will mean some considerations for investors who want to maximise their financial position.

Here, we’re taking a look at what the new CGT rules are and some areas of focus for investors in light of them.

The new rules for capital gains tax

CGT has increased from 10% to 18% at the lower rate, and 20% to 24% at the higher rate. This change came into force immediately, meaning anyone who had sold assets with gains on the morning of the Budget (30 October 2024), will fall into the new rates.

While the main rates of CGT were increased, the residential property surcharge was not. This now brings tax on assets like shares and managed funds in line with property gains.

Also unchanged was the capital gains annual allowances, which remain at £3,000 per person and £1,500 for trusts.

ISA and pension allowances become more valuable

These new rates highlight the importance of tax-efficient wrappers, making ISA and pension allowances even more valuable. Investors will need to review their asset holding structures to ensure they’re taking advantage of them.

For those with large gains in taxable accounts, a long-term view will be needed to help manage these gains over time. This is particularly true for those on the lower rate of tax, with tax liabilities potentially doubling.

And there’s another reason why CGT is likely to become a bigger issue for many investors in the coming years.

George Uglow, financial planner at Evelyn Partners says, “When tax thresholds are frozen it is often referred to as a ‘stealth tax’ as inflation and asset price increases push more people into higher tax brackets.

“That’s definitely the case with CGT as a result of this Budget. It’s good news that the CGT annual allowance wasn’t lowered, but keeping it at its current level will mean more investors will potentially go over it each year. The same goes for ISA and pension allowances, with more investors finding themselves at those limits over time and needing to consider other options.”

One such alternative which could become a bigger consideration are offshore bonds.

What are offshore bonds?

Offshore bonds are a tax wrapper which holds assets in a jurisdiction outside of the UK. Commonly used locations include the Republic of Ireland and the Isle of Man.

Uglow says, “Offshore bonds offer gross roll up of gains, which means you don’t pay any tax while the investment remains untouched and in the wrapper. Offshore bonds are non-income producing so are commonly used by trustees.

You may pay tax when the funds are withdrawn to a UK tax resident, but this can be managed, as funds could be drawn when you are in a lower tax bracket, or by allocating segments of the bond to a lower taxpaying husband, wife, civil partner, or children. You also have the 5% tax deferred withdrawal allowance which allows up to 5% of the bond’s initial premium to be drawn each year, tax deferred.

“This flexibility can make them an option to consider in a range of scenarios, such as investors looking to make gifts in the future, or those building another pot to draw on in the future.”

As with any investment, offshore bonds involve risk and can go down as well as up. It is important to seek advice before investing in, or withdrawing from, an investment bond.

Spousal exemption remains in place

Another important aspect of CGT which was not amended is the spousal exemption for CGT, which allows married couples and civil partners to transfer assets between them without triggering a CGT event.

This can be especially useful when one member of a couple is a higher earner than the other and provides the opportunity to make use of two capital gains annual allowances.

In addition, when an investor passes away, the CGT position continues to be reset, so investors with large gains may prefer to hold onto assets, rather than crystalising large gains.

Landlords under further pressure

At first glance, landlords may appear to have escaped relatively unscathed given that the residential property surcharge was not increased. However, there are a range of measures, both announced in the Budget and prior, that could put landlords under increased pressure.

The biggest blow for residential property investors announced was the increase to stamp duty land tax (SDLT) on second homes and buy-to-let real estate. The existing SDLT surcharge for these was increased to 5%, from its current level of 3%.

This comes after changes to the Furnished Holiday Lettings (FHL) rules in the Spring Budget, which removed many of the tax concessions available for these properties, and the Renter’s Rights Bill, which introduces new rights for tenants and potential higher costs for landlords.

Consider CGT changes as part of a holistic strategy

The changes to CGT announced by Reeves are significant, but they can be managed with the right strategy.

Uglow says, “The fundamentals of managing CGT remain the same after the Chancellors announcements. Having a clear understanding of your objectives and taking a long-term view are the most important things, as it allows you to take advantage of the most relevant tax wrappers, your annual allowances and plan for any tax liabilities along the way.”

For this to be done as effectively as possible, it’s important to have alignment between your financial plan and your investment strategy. That’s why, at Evelyn Partners, we believe in the concept of combined wealth management. Our expert financial planners work hand-in-hand with our in-house investment managers, giving you a direct line to both disciplines, under one roof.