The cutting of capital gains tax (CGT) in the March budget was an unexpected surprise and is good news for those with larger portfolios held outside Isas and/or those sitting on significant gains.

The budget cut the rate of capital gains tax from 28% to 20% for higher rate tax payers and from 18% to 10% for lower rate tax payers. The annual tax free allowance remains the same at £11,100.

This is welcome news for many investors, particularly those that have deferred the sale of assets on which there are significant gains in fear of a significant tax bill.

This surprise measure means that now taxpayers potentially have a personal allowance of £11,000, a dividend allowance of £5,000, a savings tax allowance generally of up to £1,000 and an annual capital gains tax allowance of £11,100. The sum total of tax free allowances now add up to a generous financial proposition, with some form of tax- free allowance for most forms of investment return, be it dividends, interest or capital growth. In addition, there is the annual ISA allowance and pension allowance.

However, the budget excluded residential property from the new, lower capital gains tax rate. The previous, higher, rates of 28% and 18%) still apply to sales of residential property (on the sale of second homes). This is a further blow to the buy-to-let sector, which had already been affected by the previous two budgets. It also means that for some, the impact of the new CGT rates will have minimal impact as it is often housing wealth that pushes people into CGT.

Investors should now be considering how to make the most of these tax cuts and whether any changes are needed to their investment portfolio construction. For example, it is now more tax efficient for money held outside Isas and pensions to be taxed as capital gains rather than income. This could mean prioritising higher growth assets rather than income-generating assets, particularly for higher rate taxpayers, where the tax difference could be as high as 25%.

Of course, each investor’s needs and circumstances are different, so talking to your independent financial adviser to review your portfolio in the light of these changes makes sense.

For help or advice, contact Kellands today.

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