Why I’m warning clients to pay tax now, before it gets worse

The following column by Charlotte Ransom appeared in The Times on Thursday 29 January. It focuses on Capital Gains Tax.

It’s that time of year again, when HM Revenue & Customs’ coffers are about to be replenished by the taxes we’re due to pay by the end of this week.

Of all UK taxes, few have changed as frequently as capital gains tax.

Successive governments have repeatedly tinkered with rates, reliefs, allowances and calculation methods. Now, with public finances under sustained pressure, the amount of capital gains tax (CGT) we pay is is widely seen as going only one way — up.

The 2024 autumn budget marked a clear turning point, with CGT rates on most assets increasing, trusts and business reliefs tightened and business asset disposal relief set on a path to becoming less generous.

For many, a CGT bill is unthinkable. The instinct is often to delay, defer or avoid it entirely. But that reaction risks turning sensible tax planning into poor investment decision‑making and, in some cases, an expensive gamble on future tax policy. Waiting to crystallise gains may do more than just defer a bill — it could make it larger.

It goes without saying that everyone should make full use of the wrappers or allowances that protect their investment returns from unnecessary taxation. The most obvious and, rightly, most discussed are pensions and Isas.

Where possible these allowances should be maximised for individuals and, where wealth allows, for spouses and potentially other family members. These wrappers allow returns to compound free of capital gains tax, which can make a dramatic difference over long investment horizons.

Pensions offer an additional advantage in that contributions are typically paid in before tax, with relief at your marginal income tax rate. Tax is paid only when funds are withdrawn. Isas work the other way round — you pay in money from taxed income but have no further tax to pay on gains or withdrawals. Both are powerful tools and will often form the backbone of any tax-efficient investment strategy.

Gilts (government bonds) and National Savings & Investments products are also popular choices because they can help you to limit your tax exposure. More sophisticated structures can also help to reduce tax, but they often require high minimum investments, added complexity or greater risk — hence the incentives.

For most investors, however, the reality is unavoidable. Once gains are realised outside these shelters, CGT applies beyond the £3,000 annual exemption.

No one enjoys paying tax but this distaste can lead to curious behaviour: clients holding on to profitable investments for years, decades, even generations, primarily to postpone a tax bill. Is this a sensible strategy?

Let’s start with the obvious point. If you are facing a CGT bill, your investment has gone up. That is, by definition, a good outcome. By continuing to hold, you are implicitly saying that you expect it to rise further. If you didn’t, you would sell. Yet in many cases it isn’t conviction that keeps investors invested, it is simply an aversion to paying tax.

That logic deserves some scrutiny. If the asset continues to rise, both the profit and the eventual tax bill grow. If it falls, you may pay less tax but only because you have locked in a smaller gain. By deferring the decision, investors not only time the market unconsciously, they potentially also pass on the problem to others, be that children or other beneficiaries who will eventually have to confront the tax issue themselves (thanks, Mum).

There is another, subtler bet being made here as well. If your conviction in an investment has waned but you are reluctant to sell because of CGT, you are implicitly assuming that rates will not rise.

That is a bold assumption. While the rates and thresholds of CGT have been tweaked countless times, the long-term direction of travel has been upwards, whether through allowance cuts or rate increases. The 2024 budget raised the rate on most assets from 10 per cent to 18 per cent for basic-rate taxpayers and from 20 per cent to 24 per cent for higher-rate taxpayers. Ask almost anyone in the tax or political world and the expectation is clear: CGT tax is more likely to rise again than to fall. Some argue that it could ultimately be aligned more closely with income tax rates.

So where does this leave those investors sitting on significant unrealised gains? The answer is straightforward. If you have strong conviction that an investment still has a meaningful upside, by all means stick with it. But if that conviction has faded, taking profits, paying the tax and locking in the gain is not a failure, it is a disciplined investment decision.

Perhaps we should think of it this way: paying CGT is the price of success.

Charlotte Ransom is the founder and chief executive of the wealth management firm Netwealth