The Autumn Budget brought unwelcome news for investors, with the Government announcing immediate increases to Capital Gains Tax (CGT) rates.
As of 30 October 2024, the rates have risen from 10 per cent to 18 per cent for basic rate taxpayers and from 20 per cent to 24 per cent for higher rate taxpayers.
Additionally, Business Asset Disposal Relief (BADR), which has long been a key tax break for business owners, will see its rate increase from 10 per cent to 14 per cent from 6 April 2025, with a further increase to 18 per cent in 2026.
One of the most effective ways to shield your wealth from unnecessary tax erosion is through tax wrappers.
These investment structures allow you to grow and manage your assets while minimising your exposure to CGT.
What are tax wrappers?
A tax wrapper is an investment structure that provides tax advantages by either deferring or exempting tax liabilities.
Different wrappers serve different purposes, some completely remove capital gains from taxation, while others allow tax to be deferred until a later date, reducing the immediate impact of tax hikes.
With CGT rates now significantly higher, careful use of these wrappers can help investors and business owners reduce or eliminate their tax burden.
How tax wrappers can mitigate the CGT increase
The increase in CGT rates means that a greater share of investment returns will now be taxed when assets such as property, shares, or business interests are sold.
However, by using tax wrappers strategically, investors can protect their gains.
Individual Savings Accounts (ISAs) – Tax-free growth and withdrawals
ISAs remain one of the most accessible and effective tax wrappers for investors.
Any capital gains made within an ISA are completely tax-free, meaning the rising CGT rates will not impact investments held within this wrapper.
Stocks & Shares ISAs, in particular, offer a way to invest without worrying about Capital Gains Tax, making them an essential tool in any tax-efficient portfolio.
Pensions – Tax-efficient growth with deferral benefits
Pensions, including Self-Invested Personal Pensions (SIPPs), offer tax relief on contributions and allow investments to grow free from CGT.
While withdrawals are taxable at the individual’s marginal rate, delaying taxation until retirement – when income is typically lower – makes pensions an attractive option for managing long-term wealth.
Investment bonds – Deferring CGT liability
Investment bonds allow investors to defer CGT until they make withdrawals, which can be particularly useful for those who want to avoid being impacted by the new higher rates.
Offshore bonds offer additional tax advantages, depending on the jurisdiction.
Business Asset Disposal Relief (BADR) – Plan ahead to lock in lower rates
With BADR rates increasing from 10 per cent to 14 per cent in April 2025 and rising again to 18 per cent in 2026, business owners should review their exit strategies.
If you are considering selling your business or shares, acting sooner rather than later could lock in lower tax rates.
Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCTs)
For those willing to invest in high-growth companies, EIS and VCTs provide generous tax advantages.
EIS investments allow for CGT deferral relief, and VCTs offer tax-free dividends and CGT-free growth, making them a strategic way to reinvest capital gains while mitigating tax liabilities.
Making full use of your CGT allowance
Although the annual CGT exemption has been significantly reduced in recent years, it still exists.
Spreading disposals over multiple tax years or transferring assets between spouses to take advantage of two allowances, can help mitigate CGT exposure.
If you would like to discuss how tax wrappers can help mitigate the impact of the CGT rise on your investments, get in touch with our team today.
