Using tax wrappers to shield your wealth from rising CGT rates

The October Budget delivered a significant shake-up, with the Government hiking Capital Gains Tax (CGT) rates across the board.  

As of 30 October 2024, basic rate taxpayers now face an 18 per cent CGT rate, up from 10 per cent, while higher rate taxpayers must contend with a 24 per cent rate, up from 20 per cent.  

On top of this, Business Asset Disposal Relief (BADR) – a long-standing lifeline for business owners – will see its tax rate jump from 10 per cent to 14 per cent in April 2025, before increasing again to 18 per cent in 2026. 

For investors and business owners, these changes mean that without proactive tax planning, a bigger chunk of their profits will end up in the Government’s hands.  

That is where tax wrappers come in. These investment vehicles can provide legal, tax-efficient ways to reduce or even eliminate CGT liability. 

What are tax wrappers? 

A tax wrapper is simply a structure that allows you to hold and grow investments while benefiting from tax advantages.  

Some wrappers completely exempt gains from taxation, while others delay tax payments until a later date, giving you more control over when and how you pay.  

With CGT rates climbing, careful use of these wrappers is now a critical strategy for investors looking to preserve as much of their wealth as possible. 

How tax wrappers can help manage the CGT increase 

The increase in CGT rates means that more of your investment returns will be taxed when you sell property, shares, or other assets.  

However, making use of tax wrappers can reduce or defer the amount of tax you pay. 

Individual Savings Accounts (ISAs) – Tax-free growth 

If you’re not already using an Individual Savings Account (ISA) to shield your investments from tax, now is the time to start.  

Any capital gains made within an ISA are entirely tax-free, meaning the new CGT rates will not affect investments held in this wrapper.  

A Stocks & Shares ISA is particularly useful for long-term investors, allowing tax-free growth on your portfolio, dividends, and withdrawals, making it one of the most effective ways to build wealth tax-efficiently. 

Pensions – Tax-efficient growth with deferral benefits 

Pension schemes, including Self-Invested Personal Pensions (SIPPs), offer tax relief on contributions and allow investments to grow free from CGT.  

While withdrawals are subject to tax at your income tax rate, deferring taxation until retirement when you may be in a lower tax bracket, provides a valuable opportunity to manage your tax liability strategically. 

Investment bonds – Deferring tax for flexibility 

Investment bonds offer another way to defer CGT, allowing investments to grow without an immediate tax charge.  

The tax is only payable when withdrawals are made, meaning investors can time their tax payments to coincide with lower-income years.  

Offshore investment bonds, in particular, provide additional flexibility for tax planning. 

Business Asset Disposal Relief (BADR) – Lock in lower rates while you can 

With BADR rates rising from 10 per cent to 14 per cent in April 2025, and then to 18 per cent in 2026, business owners planning to sell their company or shares should re-evaluate their exit strategy.  

If you are considering a sale, locking in a lower rate sooner rather than later could result in tax savings. 

Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EIS) – Tax advantages for high-growth investments 

Investing in Venture Capital Trusts (VCTs) or Enterprise Investment Schemes (EIS)-eligible companies provides generous tax reliefs.  

EIS investments allow for CGT deferral relief, while VCTs provide tax-free dividends and CGT-free growth, making them ideal for investors looking to reinvest capital gains while reducing tax liabilities. 

Making the most of your CGT allowance 

Despite CGT allowances being reduced, they still offer a way to minimise tax exposure. 

Strategies such as spreading disposals over multiple tax years to stay within the annual allowance, transferring assets between spouses to benefit from two allowances, and using CGT-exempt investment wrappers can all help to soften the blow of the recent CGT rate hike. 

Planning ahead is key 

With CGT rates now significantly higher, it has never been more important to have a solid tax strategy in place.  

Making full use of tax wrappers, whether through ISAs, pensions, or business reliefs, can make a huge difference in how much tax you ultimately pay. 

Our team of tax specialists can help you navigate these changes and optimise your investments for maximum tax efficiency.  

Get in touch today to discuss how to protect your wealth from rising CGT rates. 

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