Client Letter – Navigating CGT Uncertainty in Tax Policy
Chris Broome – Chartered Financial Planner
Good morning to you all,
I hope this message finds you well. As we approach the mid-point of the financial year, there is growing speculation about potential changes in capital gains tax (CGT) in the upcoming Budget.
I wanted to take the opportunity to discuss how this uncertainty could affect our approach to managing your investment portfolio, particularly in terms of tax efficiency.
The Current Situation
There is speculation that the Chancellor may raise the CGT rate from 20% to 40%. However, there is uncertainty about whether this change will happen, when it would be implemented, and whether any transitional measures, such as a grace period, will be introduced. This makes it challenging to determine whether we should take action now or wait for further clarity.
At this point, we’re considering a few possible scenarios:
- No Change in the Tax Rate: If the CGT rate remains at 20%, taking action now would have been unnecessary, and any taxes paid on realised gains could have been avoided.
- Increase to 40%, but only on future gains: If the tax increase only applies to future gains, we can manage your tax exposure by holding onto your current assets, knowing that gains already realised would still be taxed at 20%, and only future gains would face the 40% rate.
- Retroactive Tax Increase to 40%: If the tax increase is applied retroactively to all gains realised during the entire financial year, holding assets without taking action now could result in a significantly higher tax liability on your current gains.
- Grace Period Until the End of the Tax Year: There is also the possibility that the Chancellor may introduce a grace period, allowing individuals to realise gains at the current 20% rate up until the end of the tax year. After that, the new 40% rate would apply. This would provide an opportunity to manage your gains more effectively if we act before the grace period expires.
Balancing Risk and Opportunity
As your adviser, my priority is to help you balance the risk of higher taxes with the potential for continued portfolio growth. Right now, the key question is whether to realise gains now, at the current 20% tax rate, or hold and potentially face a 40% rate.
We need to carefully weigh the potential cost of selling early (and potentially missing out on future market gains) against the risk of paying significantly higher taxes if the retroactive or future rate increase applies. If a grace period is introduced, we’ll have more time to make this decision, allowing us to act before the end of the tax year if needed.
Our Strategy Moving Forward
At this stage, there is no one definitive course of action, but I want to reassure you that I am monitoring the situation closely. Once we have more clarity following the Budget announcement, we will reassess the situation and determine the best course of action for your portfolio. If a grace period is introduced, it could provide some additional flexibility to manage your tax exposure more efficiently.
In the meantime, I suggest we remain flexible but cautious. We will continue to review your portfolio with these possible changes in mind and will be ready to act promptly once we have a clearer understanding of the new tax policy.
Next Steps
I will keep you updated on any developments as soon as they are announced. Once the Budget is released, I will be in touch to review the specific implications for your portfolio and discuss any necessary actions, particularly if we have a grace period to work with.
Please do not hesitate to reach out if you would like to discuss your portfolio or any concerns you may have in more detail.
I’m here to guide you through this period of uncertainty and ensure we are prepared to make the most informed decisions possible.
Kind regards,
Chris Broome FPFS
Managing Director
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
Tax advice is not regulated by the Financial Conduct Authority.
The value of your investment can go down as well as up and you may not get back the full amount you invested.
Past performance is not a reliable indicator of future performance.
