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Mounting speculation of a capital gains tax (CGT) hike in the upcoming autumn budget has sparked “alarm” among UK investors, prompting them to increasingly look to methods to shield their investments from a potential “raid”, says one investment platform.
CGT, which is levied on the profit made when selling an asset, is one area that experts believe chancellor Rachel Reeves could target in her first budget on 30 October, as she seeks to fill the £22bn “black hole” in the UK’s public finances.
Reeves has ruled out increases in value added tax (VAT) and national insurance, as well as the main rates of income and corporation tax, but has not ruled out rises in CGT and inheritance tax.
Prime minister Keir Starmer has warned that this upcoming budget “is going to be painful”, stating that “those with the broadest shoulders should bear the heaviest burden”.
Read more: Reeves warns of ‘tough decisions’ in budget but pledges ‘no austerity’
One rumour is that the chancellor could decide to align CGT rates more closely with income tax. Capital gains tax rates across assets including shares and second properties range between 10% and 28%. That’s much lower than the tax rates paid on income, which range from 20% to 45%.
Alice Haine, personal finance analyst at Bestinvest by Evelyn Partners, says this “has been causing alarm for investors with assets held outside of tax-efficient wrappers”.
“There is also very real risk that a new CGT regime takes effect immediately following the budget rather than from the start of a new tax year, a scenario seen under previous administrations. It’s also a move designed to prevent investors hurriedly crystallising gains before any new rules come into effect, in turn causing a slump in tax receipts thereafter,” she says.
Haine says more investors are already looking to one method, known as Bed and ISA (or Bed and Pension) transactions, to shield their investments from a possible CGT raid.
What is a Bed and ISA?
Bed and ISA is a process that allows savers to sell investments held in a taxable environment and repurchase them within a stocks and shares individual savings account (ISA). Similarly, a Bed and Pension allows savers to sell shares held outside a tax wrapper and rebuy them in their self-invested personal pension (SIPP).
This effectively shields those assets from a potential increase in CGT, providing they don’t breach the £3,000 tax-free allowance.
“It also serves to protect any future income or gains from tax, making a savers’ investment portfolio more tax efficient over the short and long term,” Haines explains.
Bestinvest found the number of Bed & ISA instructions given by investors on its platform to effectively start these transactions had risen by 25% since Labour secured its landslide victory in the UK general election on 5 July, versus the same period last year.
With the budget five weeks away, Haines says that “DIY investors that hold assets in a trading account, or even have share certificates sitting in a drawer at home, must act fast to get ahead of any major changes to CGT”.
Read more: UK set for highest inflation of G7 group
Haines said investors typically need 10 days to complete a Bed & ISA process in full — or up to four weeks for those who need to migrate share certificates onto nominee platform to sell them.
However, she adds before investors start to “panic about hitting the deadline in time, the urgency purely relates to selling the assets and realising the CGT gain. Provided the gain is crystallised before October 30, investors can then take their time to complete the Bed & ISA process in full.”
Sarah Coles, head of personal finance at Hargeaves Lansdown and columnist for Yahoo Finance UK, says the platform was also seeing a “rise in people using their full ISA allowance to protect their investments from CGT in future”.
Since the start of this tax year, Coles says the number of people maxing out their allowance with Hargreaves Lansdown is up 31% from the same period last year.
More landlords sell up
Investor behaviour isn’t the only area showing signs of being influenced by nervousness around a potential CGT hike.
Recent data from Rightmove (RMV.L) showed that a record number of former rental homes were going up for sale, indicating that fears around a rise in CGT could be driving more landlords to sell up.
Nearly a fifth (18%) of homes up for sale were previously available on the rental market, Rightmove said, which was up from 8% around the same time in 2010. However, the property firm’s data showed this had been slowly trending higher already, as the five-year average of homes switching from the rental onto the sales market was 14%.
Tim Bannister, property expert at Rightmove, tells Yahoo Finance there had been a net outflow of properties from the rental market in recent years.
“We know when we survey landlords … they [have] had concerns regarding increasing levels of legislation and compliance and so on … coupled with the increase in interest rates which we’ve seen … since 2022/2023, has made them perhaps think whether they want to continue being landlords,” he says.
Bannister adds that there has been an uptick in properties moving from the rental market onto the sales market during the summer, saying that “obviously there are some considerations around mooted changes to capital gains tax”.
Read more: Britain’s busiest city for renting revealed
Another recent piece of analysis by Rightmove showed that there had been a surge in larger homes put up for sale earlier on in September as the autumn budget loomed.
Rightmove’s research showed the number of “top-end” homes coming onto the market for sale was up 15%, at the time, on the same period last year.
The property portal said that increasing speculation of a CGT hike could have been one driver, in addition to falling mortgage rates and more choice encouraging other sellers to act.
“In addition to landlords, second home-owners of larger homes in particular could be hit by any increase to capital gains tax, which may be leading some to cash out now,” Rightmove said.
Aneisha Beveridge, head of research at Hamptons International, tells Yahoo Finance UK that her firm hasn’t necessarily been seeing fears impact behaviour in the property market as of yet.
“I think the problem is … assuming they are going to hike capital gains tax, we don’t really know when they’re going to do it,” she says.
Beveridge explains that if the government were to announce a CGT hike and then introduce it “overnight” after the budget, in early November, it’s unlikely that people hoping to sell before then and complete on their property would have the time to do so.
“I guess the question for us is that if they’re not going to do that until April, it gives people a much longer time period to react to that change and I think that’s when we would see behaviour shift a little bit,” she says.
At the same time, Beveridge says that there has been a “little bit more chatter – and our numbers don’t really show anything yet – but more so in the prime central London market, where actually a higher proportion of homes there are second homes and we have heard a little bit that people are trying to cash in to sell them in the hope that they can complete before any hike is being brought in.”
“But I think there’s just generally a little bit more caution in that market anyway because of the broader tax hikes that are likely influence more affluent households which is kind of that market to a tee,” she adds.
CGT ‘ripe for reform’
More broadly, data released last week showed that HM Revenue & Customs (HMRC) collected £197m in CGT last month, the highest amount on record for that month since 2008. That compares to £183m in July and £170m in August last year.
A spokesperson for HMRC had not responded to Yahoo Finance UK’s request for comment at the time of writing.
However, David Denton, technical consultant at Quilter Cheviot, says: “Seeking such evidence from the most recent government data is difficult given it is both aggregated and relatively hard to read.”
“Though there is some evidence to suggest that those with rental properties have been downsizing their portfolios or have been trying to due to the rumours surrounding CGT … as well as greater compliance costs and other tax changes, it is still difficult to see this materialising in the statistics,” he adds.
Read more: More than 6,000 UK bank branches closed with Yorkshire hit the hardest
Any early signs of this in the property market are “partly because for residential property the tax must be paid within 60 days of completion — though the tax point date is exchange, not completion,” Denton explains. For other assets, he points out that tax must be paid by the 31 January in the year following the tax year of the sale.
Ahead of the budget, there have been a number of recommendations as to how to Reeves could raise additional funds.
The Resolution Foundation said that targeting CGT, inheritance tax and national insurance could help raise more than £20bn.
The think tank said CGT was “ripe for reform”, proposing that aligning capital gains tax rates with dividend tax rates, taxing property capital gains like wages, introducing capital gains tax exit charges when moving country, and applying it at death could raise up to £12bn.
Meanwhile, the Institute for Fiscal Studies (IFS) also suggested that bringing CGT rates more in line with income tax could generate substantial revenue, but said such a move would need to handled carefully.
Denton cautions that “simply doubling the rate of [CGT] will not necessarily translate to a doubling of revenue, as people change plans to avoid paying the tax”.
He points out that Denmark is country that has the highest rate of CGT in the world, at 42%, so such a policy change in the UK would “catapult us into the top position”.
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