presentation Wealth Insights | presentation UK Families | September 26, 2024

Looming Capital Gains Tax Hike: Key Insights for High Net Worth Individuals

Written by Henry Findlater

The new Labour government is scheduled to present a budget for the UK on the 30th October. What will probably not have escaped your notice are the hints from the new Chancellor Rachel Reeves that a hike in UK Capital Gains Taxes (CGT) could be imminent.

While we clearly do not have a crystal ball and cannot predict whether CGT will increase, to what level, or when it might take effect, it’s essential to consider the potential implications of a rate rise and prepare accordingly.

In this thought leadership paper, we present an expert analysis of potential CGT changes and offer crucial insights to guide your investment decisions. We have pinpointed four critical factors that should influence your choices, ensuring you stay ahead of the curve.

Key Factors to Consider

  • Tax Residency

If you’re thinking about selling your investments, the first thing to consider is where you will be living for tax purposes. If you’ll still be in the UK, keep reading. If you’re moving abroad in the near future, it might be worth holding onto your investments, unless the new country’s capital gains tax (CGT) rate is higher than the UK’s current 20%.

  • New Expected CGT Rate

There is a lot of speculation that the CGT rate will be higher, but no one knows for sure. When making a decision about whether to hold or sell and realise gains now, the new CGT rate (if there is one) is a crucial factor. Generally, the higher the new CGT rate, the longer you will need to own your taxable investments with unrealised gains to break even. If you don’t believe CGT rates will rise, holding your investments may be the better decision.

  • Future Rate of Return on Your Investments

The future rate of return on your taxable investments with unrealised UK gains will significantly impact the decision to hold or sell. Generally, the higher the rate of return going forward, the fewer years you will need to hold your taxable investments with unrealised UK gains (if CGT rates are higher) to break even after taxes.

  • Holding Period

Your time horizon is another crucial factor. The longer your holding period, the more likely a hold strategy makes sense. Conversely, if you need the proceeds in the short term (and CGT rates increase substantially), it makes more sense to sell and reset your cost basis before CGT rates increase.

Other Considerations

UK Non-Doms

  • Where you are still considered a UK non-domiciled individual the proposed changes to the non-dom regime may result in some favourable transitional opportunities which should be considered alongside the timing of any CGT events.

US Taxpayers

  • There is an additional complication with respect to US taxes. It is possible that the pound has fallen or risen since you purchased your current taxable investments. If this is the case, your GBP gains could be larger or smaller than your US gains. Gains from both a USD and GBP perspective require consideration in any CGT strategy.

Hold until Death

  • In general, if you pass highly appreciated assets to your heirs, there is currently no CGT at death. Instead, the gifted assets are subject to UK Inheritance Tax (IHT). If your taxable investments with unrealised UK gains are expected to be held until your death, holding them may make sense. We should note that this position is potentially subject to change in the budget.

Future Liquidty Event

  • If your existing portfolio is small when compared to your long-term expected savings, you should consider holding this small existing portfolio with unrealised UK gains for an extended period and invest any new savings into a brand new portfolio of different assets. This will give you flexibility when realising gains in the future as the two portfolios will have different cost basis.

Future Savers

  • If you are regularly adding to your portfolio through savings, you are likely making only purchases of new shares which can help to mitigate the impact of a higher CGT rate.

Unrealised Losses

  • If CGT rates increase, it makes sense to save your unrealised losses for future years. This assumes you can offset these losses against future gains.

Tax Advice

  • While we strive to provide you with the best investment and planning advice, we are not tax advisors. There may be specific material facts that we have not considered from a tax perspective. Therefore, it is imperative to consult your tax advisor to confirm that any strategy is optimal for you.

Conclusion

Navigating potential changes in UK Capital Gains Tax (CGT) requires careful thought and planning. Understanding the key factors mentioned in this paper and consulting your tax advisor will help you make informed decisions that match your financial goals and circumstances.

While we can’t predict the future perfectly, we must decide based on the best available information.

To carry out an accurate analysis of your situation, please think about your:

  • Tax Residency: Where will you be a tax resident when you need all the proceeds?
  • New Tax Rate: What CGT rate should we use to model your situation?
  • Expected investment Return: Should we model your situation based on future returns being lower, the same, or higher than the past 10 years?
  • Time Horizon: When will you need the proceeds from your taxable portfolio?
  • Timing: When do you think the new rates (if they change) will be implemented?

While we await further updates from the Treasury, we’re here to offer expert guidance and support. Should you have any questions or need more assistance, please reach out to your Wealth Manager.

The Legal Stuff

MASECO LLP (trading as MASECO Private Wealth and MASECO Institutional) is established as a limited liability partnership under the laws of England and Wales (Companies House No. OC337650) and has its registered office at The Kodak Building, 11 Keeley Street, London, WC2B 4BA.

MASECO LLP is authorised and regulated by the Financial Conduct Authority for the conduct of investment business in the UK and is registered with the US Securities and Exchange Commission as a Registered Investment Advisor.

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  • The information contained herein is subject to copyright with all rights reserved. The document may not be copied, forwarded or otherwise distributed, in whole or in part, to any other party without our written consent.
  • Any impact from the actual or speculative tax changes contained in this document will depend on the individual circumstances of each client and may be subject to change in the future.
  • Nothing in this document constitutes investment, tax or any other type of advice and should not be construed as such.
  • MASECO is not a tax specialist and we recommend that anyone considering investing seeks their own tax advice.
  • Information about tax changes is based on our current understanding of the changes that might be announced by the Chancellor.
  • The views expressed in this article do not necessarily reflect the views of MASECO as a whole or any part thereof.
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