Growing speculation about an increase in Capital Gains Tax (CGT) in the Autumn Budget has caused growing “caution” among UK investors, with them increasingly looking for ways to protect their investments from potential “raids”, according to an investment platform.
Experts believe capital gains tax, which is levied on profits made when selling assets, is one area that Chancellor of the Exchequer Rachel Reeves may target in her first Budget, due on October 30, as she tries to plug a £22 billion “black hole” in Britain’s finances.
Mr Reeves has ruled out increases in VAT, National Insurance and the main rates of income tax and corporation tax, but has not ruled out increases in capital gains tax and inheritance tax.
Chancellor Keir Starmer warned the next Budget “will be painful” and said “those with the broadest shoulders must bear the heaviest burden”.
Rumor has it that the finance minister may decide to bring capital gains tax rates closer to income tax rates. Capital gains tax rates on all assets, including stocks and second properties, range from 10% to 28%, which is much lower than the income tax rates of 20% to 45%.
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This is “causing anxiety for investors who hold assets outside of tax-advanced structures,” said Alice Hayne, personal finance analyst at Evelyn Partners BestInvest.
“There is also a very real risk that the new capital gains tax regime will come into effect immediately after the Budget, rather than at the start of the new tax year, as was the scenario seen under the previous Government. This is also a measure to prevent investors rushing to book profits before the new rules come into effect, causing a subsequent fall in tax revenues,” she says.
Hayne says more investors are already turning to what are known as bed-and-ISA (or bed-and-pension) deals to protect their investments from capital gains tax.
What is BED and ISA?
A Bed and Pension is a process that allows savers to sell investments they hold in a tax environment and re-purchase them within a Stocks and Shares Personal Savings Account (ISA).Similarly, a Bed and Pension allows savers to sell shares they hold outside of taxation and re-purchase them within a Self-Invested Personal Pension (SIPP).
This effectively protects these assets from any potential increase in CGT, provided they do not exceed the £3,000 tax-free allowance.
“It also acts to shield future income and gains from tax, making savers’ investment portfolios more tax-efficient in both the short and long term,” Haynes explains.
The story continues
Bestinvest found that since the Labour Party’s landslide victory in the UK general election on July 5, the number of Bed & ISA instructions issued by investors on its platform, which effectively initiate these trades, has increased by 25% compared to the same period last year.
With just five weeks to go until the Budget, Haines said: “DIY investors who hold assets in trading accounts or have share certificates sitting in drawers at home need to act fast to get ahead of big changes to capital gains tax.”
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Haines said it typically takes investors 10 days to fully complete the Bed & ISA process, but can take up to four weeks if share certificates need to be transferred to a nominee platform for sale.
However, she added that the urgency is purely to do with selling assets and realising capital gains before investors “start panicking about whether they will meet the deadline. If gains are realised by 30 October, investors can take their time to fully complete the Bed & ISA process.”
Sarah Coles, head of personal finance at Hargieves Lansdown and columnist for Yahoo Finance UK, also said that the platform is “seeing more people using their full ISA allowance to protect their investments from future capital gains tax”.
Coles said the number of people maxing out their allowances at Hargreaves Lansdown has increased by 31 per cent since the start of this tax year, compared to the same time last year.
Chancellor of the Exchequer Rachel Reeves is due to present her first budget on October 30th, as speculation of a capital gains tax increase grows, causing “caution” among UK investors. (Andrew Acheson via Getty Images)
More landlords selling
Investor behaviour isn’t the only sign of being affected by nervousness around a potential CGT hike.
A record number of former rental homes are up for sale, latest data from Rightmove (RMV.L) suggests concerns over rising capital gains tax may be encouraging more landlords to sell.
Rightmove says that around a fifth (18%) of homes for sale were previously on the rental market, up from 8% at the same time in 2010. But the estate agency’s data shows that this proportion is already gradually rising, with the five-year average of homes moving from the rental to the sales market being 14%.
Tim Bannister, property expert at Rightmove, told Yahoo Finance that there has been a net exodus of properties from the rental market in recent years.
“When we surveyed landlords, they were concerned about increased regulation and compliance, which, combined with the expected rise in interest rates from 2022/2023 onwards, are beginning to have them question whether they should remain a landlord,” he said.
Mr Bannister added that there had been an increase in properties moving from the rental to the sales market over the summer, and “clearly there is some consideration being given to proposed changes to capital gains tax”.
Read more: UK’s busiest cities for rent revealed
Separate recent analysis by Rightmove showed a surge in larger homes going on sale in early September as the autumn budget loomed.
At the time, the number of “luxury” homes for sale was up 15% compared to the same period last year, Rightmove research found.
The property portal said lower mortgage rates and greater choice encouraged other sellers to act, while growing speculation about a capital gains tax hike could have been a factor.
“Landlords and second home owners, particularly larger properties, could be hit by the increase in capital gains tax, which may encourage some to sell now,” Rightmove said.
Aneisha Beveridge, head of research at Hamptons International, told Yahoo Finance UK that the firm doesn’t see anxiety necessarily affecting property market behaviour for now.
“I think the problem is … assuming they’re going to increase capital gains taxes, we don’t really know when they’re going to increase them,” she said.
Beveridge explains that if the government were to announce an increase in capital gains tax and introduce the increase “overnight” in early November after the Budget, people wanting to sell and complete their properties before then are unlikely to have the time to do so.
“The question for us is, if the government doesn’t do it until April, it gives people a lot more time to react to the change and I think we might see people’s behaviour change a bit at that point,” she said.
At the same time, Beveridge said, “There’s a little bit of talk going around – our figures haven’t really revealed anything yet – but it’s even more so in prime central London markets, where there’s actually a high proportion of second homes. And we’ve heard a bit of talk about people trying to make money off of the rate hikes in the hope that they’ll be done before they come into effect.”
“But I think there’s a general sense of caution in that market anyway because of the broader tax increases that are likely to affect more affluent households. That’s really the market,” she added.
CGT is “ripe for reform”
More broadly, data released last week showed that HM Revenue & Customs (HMRC) collected £197m in capital gains tax last month, the highest amount for the month since 2008. This compares with £183m in July last year and £170m in August.
At the time of writing, an HMRC spokesperson had not responded to Yahoo Finance UK’s request for comment.
But David Denton, a technology consultant at Quilter Cheviot, said: “Finding such evidence can be difficult because the latest government data is aggregated and relatively hard to read.”
“There is some evidence to suggest that people who own rental property are downsizing or looking to downsize their portfolios because of speculation around capital gains tax, increased compliance costs and other tax changes, but it’s still hard to see that showing up in the statistics,” he added.
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The symptom of this is the real estate market, Denton explains, because “for residential property, the tax is due within 60 days of completion, but the tax date is the date of exchange, not the date of completion.” For other assets, he points out, the tax must be paid by January 31 of the year following the tax year of the sale.
Ahead of the budget, numerous recommendations have been made on how Reeves could raise the additional funds.
The Resolution Foundation said more than £20 billion could be raised by targeting capital gains tax, inheritance tax and national insurance.
The think tank said capital gains tax was “ripe for reform” and proposed raising taxes by up to £12 billion by bringing capital gains rates in line with dividend tax rates, taxing property capital gains like wages and introducing a capital gains exit tax when moving country and also on death.
Meanwhile, the Institute for Fiscal Studies (IFS) also suggested that significant revenue could be raised by bringing capital gains tax rates closer to income tax rates, but said such measures needed to be approached with caution.
“Simply doubling the (CGT) rate will not necessarily double revenues because people will change their plans to avoid paying tax,” Denton warned.
He points out that Denmark has the highest capital gains tax rate in the world (42%) and such a policy change would “catapult the UK into the top spot”.
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