Investing in multi-asset funds can manage UK CGT liability as rates increase

The Chancellor has increased the main rate of capital gains tax (CGT) in the Autumn Budget with immediate effect. The lower rate of CGT was raised from 10 per cent to 18 per cent and the higher rate from 20 per cent to 24 per cent.

As CGT rates increase, it’s 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.  

The annual UK capital gains tax (CGT) allowance currently stands at £3,000 for individuals (and £1,500 for trusts, subject to conditions). The previous government cut the main allowance to £3,000 from £12,300 on 6^th April 2024.

What is a multi-asset fund?

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.

Managing UK CGT through multi-asset funds

As the investment is in one fund rather than several different funds, there is no CGT charge when the manager sells underlying funds. Essentially, when the fund managers adjust holdings or rebalances within the multi-asset portfolio, no CGT charges are triggered.

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.

Offering a diversified mix of assets

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. Investors can choose a strategy that matches their investment goals, and by investing through a platform it can be cost efficient.

The economic and market outlook is far from certain and there could be volatile periods ahead. Although central banks have started to cut interest rates, there are still worries about whether there could be a recession.

By investing in a multi-asset fund, investors will therefore not only be able to reduce CGT related implications, but also benefit from a fund managers active asset allocation knowledge and insights as market conditions evolve.

Why have the UK Government raised CGT rates?

The public finances have been under increasing strain, with the UK’s tax burden already sitting at a 70-year high¹. CGT has been of growing importance to the Exchequer; in the financial year 2022-2023, CGT raised £18.1bn, the highest take on record². Pre-Budget, there was speculation that Chancellor Rachel Reeves would raise rates.

“It was hardly a surprise that the next government would need to raise taxes over and above their manifesto commitments, given the mounting spending pressures on central government,” said Graham Hook, Head of EMEA Government Relations and Public Policy Government Affairs at Invesco.

“Having boxed herself in with pre-election pledges on National Insurance, Income Tax, VAT and Corporation Tax, it was inevitable that raising the rate of CGT for shares and other investments would be one of the tax changes in the Chancellor’s sights.

“Sensibly, she has heeded advice from HMRC and others and avoided equalising the rate of CGT with income tax – a move which could have ended up costing the Treasury money.  The question now is: how will investors respond?”

The rise in UK CGT rates has increased potential tax liabilities for investors. Multi-asset funds are a way of helping investors minimise this tax charge.