Fiscal drag is pernicious. Tax bands and allowances don’t rise in line with inflation — and inexorably, people wind up paying more tax, and even get dragged into higher tax bands.
As individuals, many of us can see that happening with our own finances at present.
But pernicious though fiscal drag is, there’s something even worse: actually slashing tax allowances, as opposed to simply not raising them.
It’s exactly what has been happening with dividend tax and dividend allowances, and it’s also — as of Jeremy Hunt’s Autumn Statement of 2022 — what’s happened to Capital Gains Tax (CGT).
For investors, neither are good news. But while there are reasonable levels of awareness around dividend taxation, the unwelcome change to the CGT threshold seems less widely appreciated.
Halved and halved again
Up to 2022, the CGT allowance had obligingly ratcheted up, year after year.
And in 2022, when the Chancellor stood up to make his statement, the CGT threshold for the 2022-2023 tax year was £12,300. But by the time he’d sat down again, the threshold for the 2023-2024 tax year had been more than halved, to £6,000.
And for the 2024-2025 tax year — the tax year beginning April 6 2024, in other words — he had halved it again, to £3,000.
With the result that a CGT tax threshold that low is going to drag an awful lot of people into being subject to a tax that they’ve never paid before.
Including — potentially — investors like you and I.
You can’t avoid forced selling
Now, you might think to yourself that CGT is only applicable if you sell your shares. And that, as a long-term buy-and-hold investor, you’re not likely to sell – or at least, not sell on a scale likely to attract CGT.
Unfortunately, life isn’t that simple. Over the years I’ve seen quite a few instances of investors reluctantly selling shares in order to finance more pressing obligations.
Yes, you can sell in tranches designed to be small enough so as to not trigger a CGT obligation — but that was a helluva lot easier with a CGT allowance of £12,300, rather than a miserly £3,000.
And sometimes, that option simply isn’t available. If a company in which you’re invested is taken over, for instance, then any price appreciation in the shares may make you liable for CGT. You can’t sell in tranches to an acquirer: your shares are acquired all at once. And any gain over £3,000 makes you liable.
Government gilts?
Now, a cut in the CGT threshold to just £3,000 is going to focus minds. Maybe not straightaway, but once it starts biting people where it hurts — in their bank accounts — then we can expect investors to think about changing their behaviour.
One obvious question: might investing in other assets classes be worth considering?
In particular, various investable assets issued by the government?
UK gilts, for instance — bonds issued by the UK government — are exempt from CGT. Some products issued by National Savings & Investments (NS&I) are likewise exempt.
The big drawback? The associated interest rates can be very, very low.
Gold coins
Another idea that I’ve seen floated in recent weeks is investing in UK government-issued bullion coins — gold, silver, and platinum.
Yes, these are exempt from CGT. But do you really want your investment returns solely linked to what happens to the price of gold and silver?
You might do well. Indeed, gold has done well over the past five years; silver not quite so well.
But the faff of safely storing and insuring physical gold is a drag on returns. And opting for various paper instruments — Exchange-Traded Commodities and the like — involves paying intermediaries’ fees.
It all seems a bit uncertain, in short.
Tax-sheltered share accounts
What to do, then?
The answer is really, really simple — at least, for investors keen on equity investing. Invest as you do now, but make sure to do it inside tax-sheltered accounts.
Namely, Self-Invested Personal Pensions (SIPPs), and Individuals Savings Accounts (ISAs).
These — at least under current tax law — are entirely free from both income tax and CGT. At a stroke, then, you can breezily ignore slashed dividend tax thresholds and slashed CGT thresholds.
And, quite reasonably, you’d expect a better income return than you’d get from gilts or NS&I products. And not pay CGT, either.
What could be simpler?
