Will Labour increase gains tax rates: and if so how should this affect your investment strategy?

Whilst Labour pledged during the election campaign that they would not increase income taxes during the coming parliament they didn’t mention anything about gains tax.  Not surprisingly, the investment community fears that gains tax is an ‘easy target’ for a government that needs to raise as much tax revenue as they possibly can to finance their growth ambitions.

How likely are Labour to raise gains tax?

Looking first at the question of whether Labour will raise gains tax, Rachel Reeves stated in an interview with the BBC Radio 4 Today programme in March 2023 that: “I don’t have any plans to increase capital gains tax. There are people who have built up their own businesses who maybe at retirement want to sell that business. They may not have had huge income through their life if they’ve reinvested in their business, but this is their retirement pot of money.”

Clearly her focus in that interview answer was on business owners rather than owners of investment portfolios or second homes and it is entirely possible that the new government could introduce a different regime for different assets (currently the highest rate of gains tax on sale of houses is 24% vs 20% on the sale of company shares). However, it is at least encouraging to see that she is mindful of the motivational impact on business owners should she increase the rate of gains tax that applies to the sale of shares in businesses.

Author, Peter Glenton

How should a potential increase in gains tax affect your investment strategy?

Historically it has been common for an increase in gains tax rates to be announced in advance with the purpose of encouraging investors to crystallise gains ahead of the future rise and giving the Treasury a one-off windfall. If a rise in gains tax is enforced overnight without notice then there is no incentive to sell and the Treasury will have to wait for forced sellers before it starts to see tax revenues increase under the regime.

There does therefore have to be hope that Labour would give at least 6 months’ notice of a proposed change in gains tax (for example announcing the plan in the autumn statement for implementation from 6th April following) which would give investors the opportunity to decide what they wanted to do to get ahead of the change.

However, if investment portfolios are left alone due to a wish not to incur gains tax then over time they may become unbalanced, with a concentration in certain investment holdings which could be susceptible to future poor performance.

One strategy that is proving increasing popular with investors who have portfolios managed by discretionary investment managers is to transfer their funds into a unit trust wrapper which follows a similar investment strategy to their previous portfolio. Whilst this does crystallise any latent gain at the point of transfer into the unit trust wrapper, it means that the investment manager can make future investment changes within the wrapper without worrying about incurring gains tax for their client.

In addition, an increase in the popularity and availability of ‘passive’ index tracking investments means that an alternative and lower cost option is to adopt a ‘buy and hold’ strategy using passive funds that track the major indices.  The diversification offered by these index trackers tends to be broad enough to allay fears of a portfolio becoming unbalanced over time.

Finally, it should go without saying that investors should ensure that they are making full use of ISA allowances each year.

Photo by Amy Hirschi on Unsplash

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