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Recent cuts to the UK CGT allowance mean higher risk of taxable events in unwrapped portfolios
The post-election, economic and market outlook is uncertain and likely to be volatile
Investing in a multi-asset fund can help address these challenges
The annual UK capital gains tax (CGT) allowance fell in April 2024 to £3,000 for individuals (and £1,500 for trusts, subject to conditions). However, following the recent UK general election, there is some speculation about whether the new Labour government will seek to amend CGT rules as part of its first Budget later this year.
In this context, it is important to remember that multi-asset funds can be used to manage UK CGT liabilities in unwrapped portfolios, while providing diversification that can help reduce risk in uncertain times.
Why is investing in a multi-asset fund beneficial for managing UK CGT? In a multi-asset fund, an investor is invested in one fund that comprises many underlying funds of various asset classes, such as equity, fixed income, and alternatives, and can provide a careful blend of active and passive investments, like ETFs.
As the investment is in one fund rather than several different funds, there is no CGT charge when the manager sells underlying funds.
A liability only occurs when the investor sells units of the multi-asset fund and makes a profit that would take them above the annual allowance of £3,000, accounting for any losses or reliefs.
As a multi-asset fund is very diversified across a mix of assets, geographies and sectors, the investment can help reduce risk in times of market uncertainty. The economic and market outlook is far from certain and there could be a volatile period ahead.
There are concerns that inflation could resurge as well as worries about whether there could be a soft-landing or a recession. Investors can choose a strategy that matches their investment goals and by investing through a platform it can be cost efficient.
“With the public finances under increasing strain, and the UK’s tax burden already sitting at a 70-year high1, the new Labour government will likely have to consider some broader and perhaps more creative revenue-raising policies than those outlined in their manifesto2,” said Michael O’Shea, Director of Public Policy at Invesco.
“Given Labour have committed that, in government, the party would not increase National Insurance, the basic, higher, or additional rates of Income Tax, or VAT, speculation is rife that Labour will look at further maximising CGT revenues.”
During the election campaign, now Chancellor Rachel Reeves told the media that: “There is nothing in [Labour’s] plans that requires further tax rises3.” However, CGT is of growing importance to the Exchequer; in financial year 2022-2023, CGT raised £18.1bn, the highest take on record4.
“While Labour may not have ‘planned’ during the election campaign to raise other taxes, such as CGT, that position may change when in government and when confronted by the scale of the fiscal challenges that they face in delivering on their manifesto pledges. Even if CGT rates were to stay the same, that does not mean that related allowances or reliefs would remain unchanged.”
Recent cuts to the annual CGT allowance have increased potential tax liabilities for investors. Multi-asset funds are a way of helping investors minimise this tax charge.
Invesco’s heritage in managing multi asset investments for our UK clients goes back over 25 years. Our risk-targeted Summit Growth Range, Summit Responsible Range and Model Portfolio Service are globally diversified across a variety of asset classes and markets to better navigate volatile times.
Each range is made up of multiple diversified portfolios which are risk rated by the major risk profilers, including Defaqto, FinaMetrica and Synaptic.
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1 Source: Office for Budget Responsibility, July 2023
2 Source: Labour Manifesto 2024, June 2024
3 Source: BBC, May 2024
4 Source: Office for Budget Responsibility, April 2024
The value of investments and any income will fluctuate. This may partly be the result of exchange rate fluctuations. Investors may not get back the full amount invested.
All information is provided as 5th July 2024, sourced from Invesco unless otherwise stated.
This is marketing material and not financial advice. It is not intended as a recommendation to buy or sell any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication. Views and opinions are based on current market conditions and are subject to change.
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