Investing money inside your tax-free Stocks and Shares ISA allowance has always been a wise move, but right now it is beginning to look urgent. Chancellor Rishi Sunak is working out how he can claw back his pandemic spending splurge, and hiking the UK’s capital gains tax rate appears to be high on the list.
If he does increase the capital gains tax rate, anybody who is investing money in the stock market outside of a tax-free ISA or pension could face a hefty tax bill on their profits when they sell up. This will apply even if they are simply juggling their portfolio, selling one stock to buy another. The damage to your long-term returns could be immense. So what’s Sunak planning and how can you escape the fallout?
Currently, higher or additional rate taxpayers pay 28% on gains when selling a second home or investment property, and 20% when selling a business, antiques, jewellery, or shares held outside of an ISA. This applies to individual stocks and collective vehicles such as investment funds, investment trusts, and exchange-traded funds. Basic rate taxpayers pay capital gains tax at lower rates of 18% and 10%, respectively.
Beware the higher capital gains tax rate
Expert suggest these rates could be brought into line with income tax, which would see higher-rate taxpayers charged 40% and additional rate taxpayers 45%, regardless of the asset class. If that happens, the capital gains tax rate they would pay when selling non-ISA shares would more than double from today’s 20%.
Basic rate taxpayers would also pay double the amount, up from 10% to 20% in this scenario.
In the current tax year, people can take £12,300 before they pay any capital gains free of tax. There is talk that it could be cut to just £5,000.
We don’t know when Sunak will act. He has a budget on 3 March, but that may be too soon given current uncertainties. Whatever happens, stocks and shares investors should also take action. First, when investing new money in shares, most people should use their £20,000 tax-free ISA allowance.
ISAs save tax and trouble
Second, they need to look at their existing holdings. Investors holding shares outside of an ISA can shift them over through a process known as Bed and ISA. Most investment platforms offer this. They allow you to sell your existing investments and use the proceeds to open or top up an ISA account. You can buy the same investments again, or choose other investments if you prefer.
You may be liable to pay today’s capital gains tax rates on any gains you have made so far. However, you reduce the damage by using your annual CGT £12,300 threshold. Couples could double up on that.
There is another disadvantage to holding shares outside an ISA, on top of paying income tax and capital gains tax. You have to calculate what you owe HM Revenue & Customs, and that is complicated. By contrast, you do not even have to mention ISA holdings on your tax return.
It’s simpler and should save you money, too.