Use this tax allowance 'or risk 63% hike with extra £3,000 to pay'

Taxpayers have been alerted that their bills could potentially rise by 63% if Rachel Reeves implements a significant alteration to capital gains tax. The Chancellor is considering aligning capital gains tax rates with dividend taxes, which would result in a considerable increase in HMRC bills for those liquidating their investments, potentially leading to an additional £3,000 charge.

Currently, there's a £300 annual tax-free allowance for capital gains, after which investment growth is taxed at 10% for basic rate income taxpayers and 20% for amounts exceeding the higher rate threshold. For instance, an individual who invested £10,000 over 25 years, with an annual growth of 6%, would see their investment increase to £44,649.70.

If they were earning the average salary, they would be liable for £4,799.24 in capital gains tax upon selling their investments. However, if CGT was aligned with dividend tax, their bills would rise by over £3,000 to £7,823, marking a 63% increase.

This is due to the fact that with dividend tax, there's a £500 tax-free allowance and an 8.75% charge for amounts at the basic rate, with the rate escalating to 33.75% for the higher rate and 39.35% for amounts equivalent to the additional rate. Neil Rayner, head of Advice at True Potential, has advised individuals to consider using a crucial allowance to safeguard their money from HMRC.

He explained: "Capital gains tax has been changed multiple times by successive Governments. Whilst it is too early to tell definitively the scope and scale of any potential changes in the upcoming Budget, investors should be making the most out of their £20,000 ISA allowance which shield investments from all forms of tax including capital gains."

Growing numbers of people have been dragged into paying capital gains tax in recent years, with the tax-free allowance cut from £12,300 to £6,000 in April 2023 and then from £6,000 to £3,000 from the start of this tax year. Rob Burgeman, senior investment manager at RBC Brewin Dolphin, has also warned there could be changes to capital gains tax.

He said: "Capital gains tax is likely to undergo change, with suggestions that rates may be brought more in line with income tax bands. Does that mean you should realise gains now and pay at the current rates?

"Given the logistical challenges with modifying rates during a fiscal year, it is unlikely that capital gains tax will change before 2025/26 at the earliest – but not impossible." Another change Labour could bring in is to alter how the reliefs work for capital gains tax.

Emily Coltman, chief accountant at FreeAgent, said: This could include abolishing or reducing the amount of 'incorporation relief' that can be claimed by businesses (i.e. where a sole trader or partner incorporates their business and does not pay CGT until their shares are sold). Or it could involve abolishing ‘gift hold-over relief’ (where CGT on the disposal of a business asset will be payable by the recipient when they sell the asset, not by the donor at the time of the gift)."