Labour’s Capital Gains Tax hikes sets ‘alarm bells ringing’ – London Business News | Londonlovesbusiness.com

As Chancellor Rachel Reeves gears up for her first Budget on October 30, the rumoured hike in capital gains tax (CGT) has set alarm bells ringing—not just for the wealthy, but for anyone who stands to gain from selling assets like property, shares, or businesses.

While the media often frames this as a tax on the wealthy, the reality is that many everyday investors and small business owners could find themselves on the receiving end of a hefty bill.

It’s crucial to look beyond the political rhetoric and consider the real-world implications of a CGT hike—and, more importantly, how to mitigate its impact on your finances.

First, let’s dispel a common myth: CGT is not just a tax on the super-rich. It affects anyone who sells an asset at a profit, whether that’s a second home, shares, or even personal items worth over £6,000.

The government’s use of fiscal drag means that as asset values increase and allowances stay the same or shrink, more people get caught in the tax net.

It’s a sneaky way of increasing tax revenue without explicitly raising taxes, and it’s catching an increasing number of unsuspecting individuals.

Reeves has made it clear that she won’t raise overall tax rates, but an increase in CGT is still very much on the cards.

Aligning CGT rates with income tax rates may sound like a simplification, but in reality, it’s a significant hike. For higher earners, this could mean jumping from a current top CGT rate of 20% on most assets to as much as 45%—a more than doubling of their tax bill.

While this may seem like a straightforward way to bolster public finances, it could have far-reaching consequences for everyone from small business owners to middle-class retirees who rely on their investments to fund their futures.

But it’s not just the wealthy who will be hit. The past few years have seen a surge in house prices, meaning many ordinary families who sell a second property or a buy-to-let could be faced with unexpected CGT bills.

Entrepreneurs who’ve built businesses from the ground up could see their retirement funds eroded by a sudden increase in tax rates.

And investors, encouraged to put money into riskier assets like shares and funds, could find their long-term gains significantly diminished.

Worse, such a change could distort decision-making. If taxpayers perceive that selling an asset now will lead to a significantly lower tax bill than in the future, we could see a rush to sell, potentially destabilising markets. It’s a classic case of unintended consequences.

Protecting yourself from the taxman

So, what can you do to protect your hard-earned gains from a potential tax hike?

Of course, the best and most obvious way is to speak to a financial advisor. The tax system is full of quirks, and professional advice can help you tackle them.

There are five key strategies to consider, in my opinion.

First, maximise tax-free allowances. Everyone has an annual CGT allowance (£6,000 for the 2023/24 tax year). If you’re planning to sell assets, spreading the sales across multiple years to utilise these allowances fully can save you a considerable amount of tax.

Second, use ISAs and pensions. Investments held in ISAs and pensions are sheltered from CGT. If you’re not already maxing out your ISA allowance, now is the time to start.

Third, offset losses: If you have assets that have decreased in value, consider selling them to realise a loss. This can be used to offset gains, reducing your overall tax bill.

Fourth, explore reliefs and exemptions: Entrepreneurs’ Relief, now known as Business Asset Disposal Relief, can reduce the CGT rate on qualifying business assets to 10%. While the lifetime limit is lower than in the past, it’s still a valuable tool for those selling businesses.

Five, plan ahead: CGT planning should be part of your long-term financial strategy. If you anticipate a tax increase, which we are – especially considering the hints given at the Labour Conference in Liverpool – you may wish to bring forward asset sales to take advantage of the current rates.

Now’s the time to review your financial plans, explore your options, and take proactive steps to protect your wealth from the potential impact of this upcoming Budget next month. With the right strategy, you can mitigate the impact and ensure that you’re not paying more than your fair share.