How Rachel Reeves’ Budget Tax Grab Can Hurt Your Investments – and What You Can Do to Keep Your Money Escaping the Net

Investors always faced higher taxes in Labour’s first budget. The government has been warning us for weeks about the unpleasantness that awaits us – now in just ten days.

Sir Keir Starmer has warned the Budget will be ‘painful’ and will ask ‘big questions’ for the public. And he threatened that those with the “broadest shoulders should bear the heavier burdens” – and there is no world in which investors will be excluded from that camp.

But last week, details finally emerged about how badly hit investors could be.

Here’s what we know so far — and what it could mean for your wallet, in a best-case scenario — and whether Chancellor Rachel Reeves is making any bones about it.

What we know so far

Investors will almost certainly be taxed more on their profits in the form of capital gains tax (CGT).

CGT is paid by investors when they make a profit from the sale of valuable assets such as jewelery or paintings, shares or property that is not their main home.

Currently, at the basic rate, taxpayers pay 18 percent on profits made on the sale of real estate, and 10 percent on profits from other assets, such as shares.

Higher-rate taxpayers pay rates of 28 percent on real estate and 20 percent on other assets. Raising these rates would be the easiest way to increase the tax burden, but until last week we had little idea how far the government could go.

The first clue came on Monday, when Keir Starmer was asked whether capital gains tax could be increased to 39 percent. “It comes in the area that is far from the target,” he said.

The second clue came on Thursday, when reports suggested Chancellor Rachel Reeves had ruled out an increase in CGT on the sale of second homes.

Phew. A big relief for landlords and second home owners – and not a big loss for the Treasury either.

In fact, figures from the Office for Budget Responsibility suggest that raising the rate on second homes would actually reduce the tax burden as it would deter owners from buying and selling.

In any case, only 12 percent of capital gains taxes collected come from real estate – more than half comes from stock sales.

The news was not so positive for investors: the Chancellor has reportedly decided that she will increase the CGT on share profits.

How much will investors pay?

Armed with this information, we can begin to map out how much more tax investors will have to raise.

Firstly, all investments in a pension or Isa wrapper are fully protected from capital gains tax and so will not be affected by an increase.

Secondly, investors are allowed to make a £3,000 profit every year by selling shares outside tax-free packs – without paying CGT.

The government could choose to reduce or even abolish this limit, but that would be quite extreme. The grant has already been chopped up – from £6,000 last year and £12,300 the year before. Extreme, but unfortunately not impossible.

Investors who make a profit on shares held outside a tax-free wrapper – which exceeds £3,000 in a tax year – will face higher capital gains.

There were fears that the Chancellor would follow the recommendation of the Institute for Fiscal Studies think tank and bring CGT rates in line with income rates. That would mean a doubling of the rate that investors pay.

But as Sir Keir Starmer has suggested that 39 per cent is way off, a lower increase seems more likely.

One option, which could look Goldilocks-style in the Chancellor’s eyes, would be to increase share sales rates to the same rate for homes. This is currently 18 percent for basic taxpayers and 28 percent for higher taxpayers. Such a move, she could argue, would reduce complexity, increase the tax burden and leave taxes unchanged for second home owners, while rising for stock market investors.

Wealth and Personal Finance asked asset managers Evelyn Partners to analyze the figures to see what this could mean for your portfolio.

We asked her to consider three options. Option one – (very wishful thinking) – she leaves things unchanged. Option two: She brings capital gains tax rates for equities to the same level as real estate. Option three – she does option two and gets rid of the annual allowance. The calculations show that taxpayers with the basic rate will make the biggest jump.

Currently, a basic rate taxpayer making a profit of £10,000 would pay a minimum of £700 in CGT. If the CGT on shares were set to be the same as that on property, they would pay at least £1,260 – an extra £560. Higher and additional rate taxpayers who face the same change would pay an extra £280 – a total of £1,680.

If the annual allowance were also scrapped, basic rate taxpayers would pay more than double the amount of CGT they currently pay – a minimum of £1,800 on a profit of £10,000.

Higher and additional rate taxpayers would pay £2,400 – in other words an extra £1,000.

So how can you protect yourself?

The key is to think carefully and not make hasty decisions that you will regret later. Calculate what (if any) capital gains liabilities you may have. It may be that once you have used your ISA and current allowance, it no longer exists or is minimal and is therefore unlikely to be seriously affected by an increase in CGT.

But remember that nothing can stop the chancellor from making changes overnight (former chancellor George Osborne did that in 2010), so it may be worth thinking about it now if you can.

When it comes to protecting yourself from CBT, Isas are your best friend.

If you haven’t already used your full £20,000 Isa allowance, you can sell shares at a profit below your current £3,000 tax-free allowance and then buy them back within an Isa. Once in an Isa, all interest, dividends and capital gains earned are tax-free.

If you hold your shares with an investment platform – such as AJ Bell, Interactive Investor, Hargreaves Lansdown or Fidelity – they should manage this process – known as ‘bed and Isa’ – for you. But you’ll have to move a little.

If you’ve used up your Isa allowance, there may still be benefits to selling shares at a profit up to the value of your CGT allowance and then buying them back outside an Isa. This way you reset the purchase cost for a future CGT assessment.

However, you must wait at least 30 days before redeeming the shares – and at a time of increased market volatility, this is not without risks. Do your research and think carefully before you act.

Another option is to transfer investments to your spouse, as there will be no capital gains tax.

Has your spouse not used up the tax-free allowance or Isa allowance and you have? Then you can transfer the investments to him or her.

Pensions and savings expert Charlene Young of AJ Bell warns: ‘You just need to make sure you keep track of the original cost of the property as that will be used when your partner comes to sell it.’ She adds that there is a further benefit if your partner is a basic rate taxpayer and you are a higher or additional rate taxpayer, as current rules mean they would pay capital gains at a lower rate.

Another option is to use the current tax year’s investment losses to offset any gains before deducting your tax-free allowance. You can also carry forward losses to offset against profits in future tax years, if you haven’t already taken advantage of this.

A third useful trick is to use pension contributions to lower your income tax bracket. When you pay contributions towards your pension, this will result in your basic rate tax being extended. If you’ve only just made the switch to a higher or additional rate taxpayer, you may be able to drop yourself back below the threshold by dipping into your pension.

That would mean you could pay the capital gains at a lower rate.

“This planning tool works under the current system, but if CGT rates are equalized it will no longer be useful,” Young added.

Keep in mind that the Chancellor may have other tricks up her sleeve to increase her profits with investors. For example, your CGT liability currently dies with you, but she can make it payable on your death if it has not been paid during your lifetime.

Will the Chancellor turn into pension wrecker Brown?