Capital gains tax used to be something that rich people worried about, while the rest of us got on with making a living and feeling that we were giving the Chancellor more than enough in income tax.
But capital gains tax - or CGT - now affects many more of us, which means that we may need to look at new ways to keep our taxes under control.
Why CGT is becoming a problem
Capital gains tax was introduced by Labour Chancellor James Callaghan in 1965 and is paid on profit on the sale of an asset. The most common capital gains are from the sale of shares, bonds, precious metals, and property other than a main home, so the tax affects business owners, investors and employee share scheme participants.
There are three reasons why its impact is increasing.
- The first is that many more of us have become investors, often without really noticing it. A holiday home, the share scheme from work, an antique you bought years ago and have grown tired of might all lead to a CGT obligation.
- The second is that unlike the majority of taxes, where allowances have been frozen (and effectively increased by stealth as the result of inflation) CGT allowance have been drastically cut. The allowance on capital gains was reduced from £12,300 to £6,000 in April 2023, and halved again to £3,000 in the current tax year.
- The third is inflation. The cash price of assets has increased, meaning that when we come to sell things we own, we are likely to do so for much more than we paid for them.
How much will you pay?
The threshold for CGT is the Annual Exempt Amount (AEA). For the 2024/25 tax year and subsequent years, the AEA will be at £3,000 for individuals and personal representatives, and £1,500 for most trustees.
If you’re a higher or additional rate taxpayer (with overall annual income above £50,270 you’ll pay 20% on gains from investments and most other assets. The exception is residential property, which was set at 24% in the budget of March 6th.
Basic Rate Taxpayers pay 10% on their gains, or 18% on residential property. But beware. If your capital gains take you above the higher rate threshold, you will pay tax at the higher rate.
But can you cut your CGT bill?
While there is no escaping CGT there may be ways to reduce it.
HMRC provides some generous allowances to married couples or civil partners when it comes to owning assets jointly.
Share the burden. If you jointly own an asset, such as a buy-to-let property, the allowances of both parties can be combined. If you are married or in a civil partnership, you may be able to split your assets with your husband, wife or civil partner. This means that you can effectively double your allowance to £6000 and boost how much profit you can take tax-free when selling shares or an additional property.
Assets can also be transferred between spouses or civil partners without incurring CGT. This is useful if one partner is in a lower tax band or where one has losses that can be used to offset any gains above the annual capital gains tax allowance.
Drop your tax bracket. CGT liability varies with your tax bracket. Drop down to a lower bracket, and you have less CGT to pay. So, if the numbers work out, you might be able to pay more into to a pension to fall into a lower tax bracket which in turn, cuts your CGT.
Stagger the sale. If you stagger the sale of an asset such as shares over several tax years, you can make the most of several years’ CGT exemption. This takes some planning, but if you were to sell part of a share portfolio on 5 April and the rest on 6 April, it would let you take advantage of two years’ CGT allowances.
Make a loss. You can offset any losses you’ve made on other assets. Losses made in the current tax year can be offset against any gains and if you don’t use your losses this year you can carry forward any losses for future tax years, to offset against future gains. Just make sure you register the losses with HMRC within four years.
Bed and ISA. This is where you sell assets up to your CGT limit for the year and then buy them back within an ISA, which means you’ll protect any future gains from the taxman. You can usually use your platform’s Bed and ISA service to take care of the selling and buying for you.
Invest in gilts. Bonds in general are now offering a far more attractive level of income than at any point since the global financial crisis. Gilts – UK government bonds have another benefit – you don’t pay any capital gains tax on gilts you hold directly.
Don’t sell at all. Finally, you can simply not sell assets. Holding on to them until you die makes them part of your estate. CGT is effectively returned to zero on your demise – although inheritance tax will probably kick in, and at a far higher rate than CGT unless you make appropriate provisions.
Get some expert help
Tax is complicated, and without expert advice, attempts to reduce your tax liabilities could make matters very much worse.
At Continuum, we can provide the expert help you need, whether you are ready to dispose of assets, or want to start building up a portfolio that the taxman cannot share in.
To make the most of your investment future, call us today.
Capital gains tax allowances and rates - Which?
The information contained in this article is based on the opinion of Continuum and our understanding of current HMRC tax rates and does not constitute advice on a suitable taxation or investment strategy, you should seek independent financial advice before embarking on any course of action.
The Financial Conduct Authority does not regulate taxation and trust advice or will writing.
Levels, bases and reliefs from taxation are subject to individual circumstances and may be subject to change.
The value and returns of an investment are not guaranteed, investors may lose some or all of their investment. Capital is at risk.
