Jasmine Birtles
Your money-making expert. Financial journalist, TV and radio personality.
How To Minimize the Impact of a Labour Government on Your Capital Gains
Jasmine Birtles
21st Jul 2024
Can you believe that Labour have been in power for over 2 weeks? These last few weeks have come with a LOT of speculation around how the party will handle tax, with many investors worried about what the future might hold!
In a nutshell, Labour have made some pretty big spending plans but have not yet revealed how these plans will be funded. The best guess? A capital gains tax raid!
Capital gains tax (CGT) is currently taxed a lot less than income in the UK. This makes it an obvious target for Labour funding and one that has sparked market-wide concern.
Before the general election, many of Britain’s richest hurried to move their investments around in fear that taxes would rise. For some, this meant selling large investments before the Labour win. Others moved investments into tax-efficient alternatives that could provide some relief from potential CGT hikes.
If you did not manage to make some clever moves before the election, there is still time! In this post, I will share 3 ways that you can protect your investment portfolio from a potential Labour tax raid.
1. Increase your pension contributions
Did you know that the tax you pay on your Capital Gains is directly related to the rate of Income Tax that you pay?
So, by putting a bit more in your pension pot, you could increase the upper limit of your tax band and potentially reduce the tax that you pay on your investments.
The basic threshold before you have to pay a higher-rate tax is £50,271. However, you can increase this by making pension contributions from your salary packet.
A pension contribution of £10,000 per year, you could increase the threshold to £60,251.
Any capital gains that fall below this threshold will be subject to the lower 10% CGT rate instead of the 20% rate.
However, it’s worth doing your own research before making any changes to your pension contributions. There are other factors at play!
2. Donate money or assets to charity
If you feel like doing a good deed, you could donate money or assets to charitable organisations.
Any gifts that are made to registered charitable organisations are currently exempt from CGT in the UK.
Gifting shares, property or land to charity not only offers some tax relief, but it’s also a great way to help organisations that you care about.
Again, there are several variables to consider before going ahead with this and it is important to consult a financial advisor before making any decisions.
3. Invest in an Enterprise Investment Scheme
Enterprise Investment Schemes (EIS) are government-driven initiatives that were put in place to encourage investment in small UK businesses.
The money that you invest in an EIS is used to buy underlying shares of companies that are not currently listed on the stock market. You can make a profit when the company is eventually listed or sold.
To encourage more people to consider these investments, the government offers tax relief to investors. As it stands, you can claim up to 30% income tax relief on the money that you invest in an EIS (up to £1 million per year).
By doing this, you could reduce your taxable income which could also reduce the amount of CPT that you are required to pay.
Furthermore, any returns that you make from your EIS investment are free from CGT, as long as you have held the investment for more than 3 years.
A word of warning!
The purpose of this article is to provide a bit of insight into how investors could potentially protect their portfolios from Capital Gains Tax. However, this shouldn’t be taken as direct advice.
Tax is a complicated topic and individual tax circumstances are subject to change. You should always talk to a financial advisor before making any decisions. It is also important to make sure that you pay what you owe! The fines for underpaying your taxes can be pretty substantial.
Tax relief schemes are put in place to encourage more investors. However, some investments that are eligible for tax relief come with high risk! It is important to assess whether the risk of investing is worth lowering your tax bill.
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Disclaimer: MoneyMagpie is not a licensed financial advisor and therefore information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This should not be considered as financial advice. Anyone thinking of investing should conduct their own due diligence. When investing your capital is at risk.
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