Until the government starts taxing sex, capital gains tax (CGT) is probably the most annoying tax to pay.1

Capital gains tax is levied on the profits you make when you sell or transfer most assets. These assets include shares, investment properties – or even a stake in your own company.

And like a maggot in your birthday cake, capital gains tax can really spoil the fun of making money.

Inheritance tax is a tax on your good fortune. Income tax is the cost of having a job.

But CGT is a tax on investing success.

Take cover from CGT! Always try to use tax shelters like ISAs and pensions to shield your investments from taxes where possible. No tax is payable on gains realised within these wrappers.

Of course, you won’t always make a profit when you sell an investment.

Sometimes you’ll lose money. That’s called a capital gains loss.

Unfortunately you don’t get money back from the government when you lose money.

However you can offset capital losses against your capital gains to reduce the total gain you pay tax on. You can also defuse unsheltered gains using your annual CGT allowance.

How UK capital gains tax works

Like income tax, CGT is calculated on the basis of the tax year. This runs from 6 April to 5 April the following year.

You pay tax on the total taxable gains you make selling assets in the tax year, after taking into account:

• Your annual CGT allowance. (See below).

• Other reliefs or costs that can reduce or defer the gains.

• Allowable losses you made by selling assets that would normally be liable for CGT. (The opposite of a capital gain, in other words).

Everyone has an annual capital gains tax allowance, or ‘annual exempt amount’ in HMRC-speak. This allowance was halved to £3,000 as of 6 April 2024. The allowance has now been frozen.

If your total taxable gains, minus any deductions, comes to more than your annual allowance, then you pay CGT on everything over that tax-free allowance.

Capital gains tax rates

There are several different rates for capital gains tax. The rate you’ll pay normally depends on two things:

• Your total taxable income.
• What sort of assets you’ve made a profit on.

Second homes and buy-to-let properties are taxed at different rates from other assets.

For most taxable assets:

• Basic-rate taxpayers pay 10% on their capital gains.

• Higher-rate taxpayers pay 20%.

For second homes and buy-to-let properties2:

• You’re charged 18% at the basic rate on your property gains.

• Higher-rate taxpayers pay 24%.

Your main home is nearly always exempt from capital gains tax under what’s called Private Residence Relief. This is automatically applied unless you’ve let your home out to more than a single lodger, used it for business, or if you’ve substantial acreage. In those cases, CGT might be payable.

Note that you might normally be a basic-rate taxpayer, but pay a higher rate on your capital gains. This could happen if the money made via your gains moves you into the higher-rate tax bracket.

To work out what rate you’ll pay, your capital gain is added to your taxable income from other sources (salary, dividends, savings interest, and so on).

It can get a bit complicated. See HMRC’s notes on working out your capital gains tax rate band.

What is CGT charged on?

Historically-speaking, CGT has been a fairly avoidable tax for most everyday investors in the UK.

(Remember, you’re allowed to mitigate your taxes. Tax evasion is illegal.)

However the big decline in the annual CGT allowance – from over £12,000 a few years ago to just £3,000 from 6 April 2024 – has made it much harder to mitigate a potential capital gains tax bill.

Putting assets into tax shelters before they make any gains has thus become even more important.

Most capital gains on asset sales are taxable, but in the UK capital gains tax is NOT charged on:

• Your main home (in 99% of cases)
• UK Government bonds (gilts)
• ISA and SIPP holdings
• Personal belongings worth less than £6,000 when you sell them
• Your car, unless used for business
• Other possessions with a limited lifespan
• Betting, lottery, or pools winnings (including spreadbets)
• Money which forms part of your income for Income Tax purposes
• Venture Capital Trusts
• Certain business holdings that qualify for entrepreneur’s relief

That still leaves many key assets liable for UK capital gains tax:

• Shares
• Corporate bonds
• Funds
• Antiques
• Buy-to-let property
• Land
• Gold (unless UK coins)

Remember if you can hold these assets inside a tax shelter (ISA or pension) you’ll escape the clutches of capital gains tax.

As I’ve already mentioned, you also have that annual capital gains tax allowance. So you won’t necessarily be liable for CGT just because you’ve sold some taxable assets and made a profit. It all depends on your total gains for the year.

You might also be able to postpone paying your CGT bill by claiming deferral relief on certain special government-sanctioned investment schemes (EIS and SEIS). However these investments can be very risky.

Do your research, and don’t risk big losses just to cut your tax bill.

When to report capital gains tax

You need to report your taxable gains via your self-assessment tax return if:

• Your total taxable gain in the tax year exceeds your CGT allowance, and/or

• Your sales of taxable assets are in excess of £50,000 and you’re registered for self-assessment.

Under the current regime, if you sold £20,000 worth of shares in the year for a total gain of £2,000, there’s no need to report any of it. £2,000 in gains is below the 2024-2025 annual CGT allowance. And your total sales were less than £50,000.3

In contrast, if you’d sold £52,000 of shares, say, and you are registered for self-assessment, then you would have to report the details to HMRC, regardless of the size of your total gain. That’s because you’ve sold taxable assets in the year excess of the £50,000 annual threshold.

Note: the old annual reporting limit (which was set at four times the annual CGT allowance) was replaced in April 2023.

Capital gains are pooled together

All capital gains and losses go into the same ‘pot’ from the Inland Revenue’s point of view.

For example, if you made a gain (i.e. profit) of £15,000 selling shares and £8,000 from selling an antique wardrobe, then your total capital gain is £23,000.

Here losses might help you out.

For example, let’s imagine you make a taxable gain on your shares but a loss on selling your buy-to-let property. Your property loss can be offset against your capital gains on shares to reduce or even wipe out the tax bill that might otherwise be due.

See my article on avoiding capital gains tax for other strategies.

Who pays Capital Gains Tax in the UK?

Very few members of the general population pay capital gains tax.

A recent study of anonymised personal tax returns found that 97% of people never make any capital gains. And those who did were generally drawn from the ranks of the wealthy.

According to a Guardian story on the research:

Just 0.3% of people with income under £50,000 had taxable gains in an average year, compared with almost 40% of taxpayers with incomes over £5m receiving some gains.

Almost half of those who made a capital gain lived in the south-east. A quarter lived in London.

So we can see that paying capital gains tax puts you into a fairly exclusive club.

For investors, however, capital gains is an occupational hazard. If you are not able to do all of your investing inside ISAs and pensions, then you will probably pay CGT sooner or later.

Especially now that the annual CGT allowance has been slashed.

Capital gains tax and me

I’ve paid CGT. I wasn’t even very wealthy at the time. Certainly my annual income was no great shakes.

When I began investing 20-odd years ago, it was with a biggish lump sum that I’d originally saved up as a house deposit.

I should have steadily put this cash into ISAs over the ten years or so it took me to save it. But I was silly and I didn’t. And so when I began investing, I had to build up my ISA tax shelter capacity from scratch. One year’s allowance at a time.

Eventually this landed me with a five-figure CGT bill when I finally sold the last of my unsheltered investments – and this despite years of diligently defusing my gains along the way.

The investment in question had gone up more than ten-fold since I bought it outside of an ISA, a decade or so earlier.

Lucky me, you say?

Perhaps, but remember I wasn’t super-rich. I began as just a determined saver trying to keep up with the runaway London housing market. My initial deposit comprised of several tens of thousands of pounds of hard-won savings that I could have spent instead on holidays, clothes, or simply having more fun in my 20s and 30s, like most of my friends.

Which is why I usually write that you ‘make’ a capital gain, or even that you ‘earn’ a gain.

Whereas The Guardian with its own biases says you ‘receive’ it. As if the capital gain just falls from the sky – like windfall!

That is true of an inherited gain, say – at least for the recipient

But capital gains nearly always only come after you’ve risked your own money.

So do what you can to keep hold of that reward in full.

1. Update: since I first wrote this article I bought my own home and paid Stamp Duty Land Tax at 5%. It turns out that’s just as annoying. [↩]
2. Held personally. Properties held via a limited company are on a different regime. [↩]
3. Remember, these are sales outside of an ISA or SIPP. Sales within shelters are not liable for CGT and not counted at all. [↩]

A question from a reader about ‘bed and breakfasting’ – and she’s not talking about English muffins versus the continental options:

Dear Monevator,

I have an old investing book/bible that tells me I should be bed & breakfasting my shares to reduce taxes. Is this possible in the era of Airbnb? (Just joking!) Seriously what is bed and breakfasting shares? Is it still even legal as I don’t think you’ve written about it?

Yours,

A. Reader

Dear reader! So-called bed and breakfasting was a now-defunct method to help you reduce capital gains tax on shares (CGT).

In the olden days – when mitigating taxes was mostly a sport for retired stockbrokers in the Home Counties – you would sell a fund or tranche of shares you owned one day to realise a capital gain – ideally for less than your annual CGT allowance – and then buy back the same fund or shares the next day.

Doing so reset your cost base. Which, in turn, defused the future capital gains tax liability you were building up when your fund or shares rose in value.

What a wheeze!

People typically did their bed and breakfasting at the end of the tax year. They’d sell on the last day of the tax year and then buy back the next day.

Bed and breakfasting enabled you to make use of your annual CGT allowance without losing exposure to an investment that you presumably wanted to keep. (Since you only sold it to defuse the CGT).

No more bed and breakfasting CGT

Bed and breakfasting was a simple operation. But it cunningly helped prevent moderately-sized gains from becoming liable for tax by defusing a portion of the gains each year.

Alas the whole scheme long ago went the way of paying urchins to sweep your chimney. Bed and breakfasting was crippled by tighter rules about when you can repurchase the same asset if the disposal is to count as a taxable sale.

In short: nowadays you can’t just sell and buy back the next day to defuse CGT.

Instead you must leave a 30-day period between buying and selling the same assets. Any less and you haven’t crystalised the CGT gain from HMRC’s perspective.

Thirty days! That’s not so much bed and breakfasting as bed and hibernating!

During those four and a bit weeks, of course, the value of your investment will fluctuate. So you could miss out on gains. (Or losses…)

What’s more, the CGT allowance has been cut and cut again in recent years. This means there’s much less headroom for defusing gains anyway.

On the other hand, we do enjoy a generous £20,000 annual ISA allowance.

And ISAs are entirely impervious to tax, which means that over the years you can build up a chunky tax shelter to hold your assets inside and never worry about CGT anyway.

Alternatives to bed and breakfasting to reduce CGT liabilities

If you do still hold assets in general investment accounts – i.e. outside of ISAs and pensions – then there are other options to bed and breakfasting, which exploit the same general idea of using up your CGT allowance to defuse gains.

They are not perfect swaps, but you could:

• Bed and ISA: You can sell a fund or shares you hold outside of an ISA and then put the money you raise into your ISA. Within the ISA you can repurchase exactly the same assets if you want to. From then on it can grow without concern for the taxman, like anything else in an ISA. The 30-day rule doesn’t count with respect to these ISA purchases. The obvious snag is your annual ISA allowance is limited in size. That restricts how much bed-and-ISA-ing you can do in a particular year.

• Bed and SIPP, bed and spreadbet, and so on: You can apply the same principle of Bed and ISA to other investment vehicles that give you the same exposure but do not violate the 30-day rule. But be careful not to let ‘the tax tail wag the dog’, as they say. (For example, money put into a SIPP can’t come out until you draw your pension. Meanwhile spreadbetting to avoid CGT has lots of risks for the unwary).

• Bed and spousing: Married couples and civil partners can keep an investment in the family when crystalising a gain by having one partner sell the asset, and the other party simultaneously buy it back under their own name in their own account.

• Give and take: Legally sanctified couples can also look into gifting each other assets. Such gifts are made at cost – rather than market value as would otherwise be the case. Swapping assets like this can be handy if one spouse is likely to have some capital gains tax allowance to spare or if they pay a lower tax rate. They may still face a taxable gain when selling the assets, but they could pay less tax when they do so than the other partner would. (I should confess that as a lonely misanthrope irrepressible singleton, I’ve only ever read about these arcane ceremonies).

• Bed hopping: There’s nothing to stop you selling one asset to use up your allowance and then buying something similar but different with the proceeds. You could sell your shares in big oil firm Shell, say, and then buy shares in BP. Obviously you’re now invested in a different company, but you’ll still retain exposure to an oil major. Another example would be to sell an actively managed emerging markets fund and then buy an emerging market tracker. You can even swap global tracker funds from different management houses. (The latter is a slightly grey area. Perhaps choose funds that track different global indices for a belt-and-braces approach.)

• Bed down for a month: You could sell shares that you’ve made a good gain on, and then roll the proceeds into an index tracker. After 30 days you could sell some of the tracker to fund a repurchase of the original shares if they still looked good value.

Keep records of all these trades in case you need to report them to HMRC.

Worth doing, but better avoided

There’s a cost to churning your portfolio like this, and it’s not just heartburn.

Share dealing fees may be low – or even zero – these days. But stamp duty of 0.5% on most share purchases will make a dent into your capital. There are bid/offer spreads, too.

What’s more, if you plan on doing a return trip after 30 days then that’s going to double your costs again. (You could just sit in cash. But then you risk the market moving against you.)

Again, it’s always best to invest in an ISA or pension where possible. This keeps your investments shielded from CGT entirely. Start young and you can build up a substantial ISA portfolio, while annual pension contributions can currently be up to £60,000, if you earn enough. Though who knows how long before the politicians meddle with pensions again.

Some people do still have big portfolios outside of tax shelters. Maybe they’re rich, or they’re obsessed with investing. Or perhaps a lump sum like an inheritance overwhelmed their limited annual allowances.

If that’s you, then the methods I’ve talked about above are worth doing to prevent taxes eating up your returns in the future.

Conventional equity / bond portfolio splits did not acquit themselves well during the cost-of-living crisis. When the enemies at the gate were fast-rising interest rates and inflation, standard portfolios looked like a suit of armour missing its faceplate – nominally effective but with a glaring weak spot.

If only someone would invent the faceplate.

Well as it happens, somebody already has.

The All-Weather portfolio integrates a fuller spectrum of defences – including assets with a better record against the withering winds of inflation. (Hmm, smooth metaphor mixology – Ed).

We’ll examine the long-term track record of the All-Weather portfolio in a minute. But first we need to ask…

What is the All-Weather portfolio?

The All-Weather portfolio was popularised by Ray Dalio, the founder of the Bridgewater hedge fund behemoth.

The portfolio is configured to contain downside risk by including a variety of asset classes such that the portfolio as a whole is capable of performing regardless of the macroeconomic conditions.

Bridgewater identified the weather conditions that investors should prepare for as:

• Economic growth
• Economic slowdown
• Inflation
• Deflation

Those scenarios and their asset class countermeasures combine to present an investment model:

The model’s four quadrants represent the main economic environments that we’re likely to pass through during our investing journey.

Pack a raincoat and a sunhat

Each quadrant is staffed with the asset class(es) most likely to positively respond to its conditions:

Left-hand upper quadrant: Rising demand and low inflation is the economic equivalent of glorious sunshine. Fast-growing equities is the ready-to-wear investment outfit for this type of weather.

Left-hand lower quadrant: Falling demand and low inflation (or even deflation) means we’re in for a market storm. Shelter beneath a sturdy umbrella fashioned from bonds and cash.

Right-hand upper quadrant: We’re sweltering as rising demand and high inflation overheats the economy. Commodities are well-adapted to these conditions, even though they can feel ridiculous at other times – like wearing a giant sombrero to a board meeting.

Right-hand lower quadrant: Stagflationary intervals of falling demand and high inflation call for a coat of inflation-linked bonds. The UK’s own index-linked gilts were issued from 1981 partly to restore confidence in governmental fiscal responsibility after the stagflationary 1970s.

Imagine you find yourself invested during one of these four seasons at any given time. The model reveals which asset class is suited to each circumstance.

However even Bridgewater concedes it can’t consistently forecast shifts in economic weather fronts. Hence the All-Weather portfolio hedges uncertainty, by taking a position in each useful asset class.

Granted, this is a very simple model and asset classes aren’t guaranteed to respond according to type. Yet the empirical data shows that the strategy is relatively weather-proof over the long-term.

We’ll dig into the specific asset allocation recommended by Dalio’s portfolio in a moment, but first we need to acknowledge some caveats.

Caveat acknowledgements

Inflation-linked bonds are only certain to hedge against inflation in the short-term if you hold them to maturity. You can’t do that with linker funds, but you can with individual index-linked gilts. See our post on building an index-linked gilt ladder.

Gold is sometimes placed in the right-hand quadrants because it has a reputation as an inflation hedge. This is a myth. See our post on whether gold is a good investment.

As it happens, gold still earns its place in the All-Weather portfolio due to its lack of correlation with equities and bonds. In asset allocation terms, gold is like that Swiss Army knife tool whose original purpose is a mystery, but which often comes in handy all the same.

The Ray Dalio All-Weather portfolio: asset allocation

A passive investing version of the All-Weather portfolio could be structured like this:

• 30% equities
• 40% long-term government bonds
• 15% medium-term bonds
• 7.5% commodities
• 7.5% gold

You may be shocked by the idea of holding 55% in bonds. The Ray Dalio portfolio is designed like this because it’s informed by the principle of risk parity, which aims to better balance risk exposure across its different building blocks.

For example, a stock-heavy portfolio loadout – an 80/20 split or even the 60/40 portfolio – is making a big bet on the performance of equities. That’s obviously fine so long as equities perform. But if you live through a multi-decade stock market depression then you have a problem.

Meanwhile, the overwhelming bulk of such a portfolio’s risk exposure (as measured by volatility) is stored in its large equity allocation. When stocks plunge the portfolio does too, because it doesn’t pack enough bonds to offset the equity downdraught.

The risk-parity approach tries to solve this issue by attempting to equalise the amount of risk associated with each asset allocation.

We’ll see clearly in a moment that this strategy works – but there is a price to pay.

Why no inflation-linked bonds?

If inflation-linked bonds are so great at combating inflation why don’t they feature in the All-Weather portfolio?

The short answer is that the portfolio was conceived in the US before TIPs existed. (TIPs – Treasury Inflation Protected Securities – are the American equivalent of the UK’s index-linked gilts).

Bridgewater acknowledges that inflation-linked bonds are an important part of the All-Weather strategy. However the investment community hasn’t updated on that fact.

It’s a strange instance of cultural inertia – a bit like the Japanese devotion to fax machines. We’ll look at a version of the All-Weather portfolio that does include index-linked gilts in the second part of this mini-series.

All-Weather portfolio drawdowns

Alright, let’s check that the All-Weather portfolio works as advertised. Is it less volatile than conventional portfolios when the market blows a gale?

This drawdown chart shows us how the All-Weather portfolio performs vs 100% equities and the 60/40 portfolio during every market setback from World War 2 onwards:

Data from Summerhaven1, BCOM TR, JST Macrohistory2, British Government Securities Database, The London Bullion Market Association, Measuring Worth and FTSE Russell. July 2024.

Not reliving your personal worst nightmare in the stock market when you scan the graph above? We’re using annual returns, which can blunt the extreme edges of bear markets compared to monthly peak-to-trough measurements. (Sadly, monthly data isn’t publicly available for gilts pre-1998.)

You easily notice though that the deepest declines still look like jagged ravines  – and that conventional portfolios fall much further than the All-Weather.

Navigating stock market hurricanes

100% equity portfolios in particular aren’t for widows, orphans, or those with a dicky ticker.

For example, during the UK G.O.A.T. crash of 1972-1974, the All-Weather portfolio ‘only’ dropped -28% compared to -60% for the 60/40 and a mind-bending -72% for 100% equities.

Investing returns sidebar – All returns quoted are inflation-adjusted, GBP total returns (including dividends and interest). Fees are not included. The timeframe is the longest period that we have investable commodities data for. Equities are UK, because world data is not publicly accessible before 1970. The long-term historical gilt index is dominated by long-dated maturities. Separate data is not available for intermediates. Thus the All-Weather fixed income allocation here is 40% long bonds and 15% money market/cash. Portfolios are rebalanced annually.

Most extraordinary were the Dotcom bust and the Global Financial Crisis (GFC). While conventional portfolios heaped misery on their investors, All-Weather owners were asking “bovvered?” with a shrug.

Here’s the steepest loss each portfolio bore during those market tempests:

Those were two almighty crashes. The largest of the 21st Century so far! Yet the dip registered by the All-Weather portfolio would barely give you butterflies, never mind sleepless nights.

Casting our eyes back to the drawdown chart cum investing slasher flick above, we can also see that the All-Weather portfolio merely performed much the same as the 60/40 on some other occasions.

Typically this happened when bonds were crunched harder than equities and the performance of the All-Weather’s minor asset classes didn’t compensate.

The most significant of these incidents was in the late 1950s and during the 2022 bond crash.

Overall though, the All-Weather delivers on its promise of relatively smooth sailing.

See these 1934-2023 volatility figures:

Nice – but remember this stability has been bought by loading up on bonds and cash. And that must have cost a fair wedge of return, right?

Right…

All-Weather portfolio historical performance

Here’s the total return growth chart:

Inevitably, the All-Weather’s two-stroke equity engine leaves it underpowered versus normie portfolios.

A table of cumulative and annualised returns tells the story:

And there’s the rub. Tricking the portfolio out with gold and commodities doesn’t circumvent the usual risk/reward trade-off (though other figures do show it’s far superior to a 30/70 equity/bond split). The dampening of drama on the downside means a lack of fireworks on the upside.

That said, if you like your returns risk-adjusted then the All-Weather delivers:

The Sharpe ratio is a measure of risk vs reward. The higher your Sharpe ratio, the better your risk-adjusted returns. In other words, the more return you get per unit of risk, as measured by volatility3.

By that measure the All-Weather portfolio offers more growth in exchange for the pain it causes. In contrast there’s scarcely any difference between the 60/40 portfolio versus 100% equities.

Which essentially means that UK government bonds have not been a great risk-reducer historically – much less so than in the US experience – as we pointed out when we wrote: Why a diversified portfolio needs more than bonds.

Should you choose an All-Weather portfolio?

If you hate market turmoil or your focus is on holding on to what wealth you have, then Dalio’s brainchild looks like an excellent choice.

I’ve often wondered how I’d cope if I had to face a rout on the scale of 1972-74. The All-Weather portfolio would reduce my odds of ever being blasted like that.

But if you need more growth than the All-Weather offers then you’ll have to overclock your equities and accept the consequences. It’s that, extend your time horizon, or increase your contributions.

The undeniable downside of the All-Weather approach is this lack of equity oomph. That means it’s not ideal for young investors hoping for lift-off or for accumulators still far from their investing destination.

If that’s you then choose a more conventional portfolio, so long as you’re prepared to accept the risks.

How to build an All-Weather portfolio

*Use a global tracker fund to include emerging markets diversification.
**See comments above about using individual linkers to hedge inflation. If that’s too time-consuming then opt for a short-duration global inflation-linked bond fund hedged to GBP.
***Broad commodity ETFs diversify across commodities futures and are the right choice to replicate the asset class.

The ETFs I’ve listed in the table are just suggestions to get you started. They’re good but not intrinsically better than other choices you could make.

In truth, index trackers are like tins of soup: much of a muchness. For more options see our low-cost index funds article.

I wouldn’t use an intermediate gilt fund to replicated the original All-Weather’s 15% fixed income allocation. US intermediates are typically much shorter in duration and therefore less volatile than their UK counterparts. A money market, or short linker, or short nominal gilt fund can fill this slot.

Indeed the various options – plus material differences between the US and UK markets – might imply there’s some cunning asset allocation tweak that can squeeze a bit more juice out of the All-Weather portfolio for British investors.

We’ll investigate that in part two.

Take it steady,

The Accumulator

1. Bhardwaj, Geetesh and Janardanan, Rajkumar and Rouwenhorst, K. Geert, The First Commodity Futures Index of 1933, Journal of Commodity Markets, 2020. [↩]
2. Òscar Jordà, Katharina Knoll, Dmitry Kuvshinov, Moritz Schularick, and Alan M. Taylor. 2019. The Rate of Return on Everything, 1870–2015. Quarterly Journal of Economics, 134(3), 1225-1298. [↩]
3. i.e. annualised standard deviation [↩]