Many UK adults consider Capital Gains Tax (CGT) something that only affects the super-wealthy.
However, rising asset values have seen more Brits finding themselves with a CGT bill in recent years.
Indeed, according to government data, the total CGT liability in the 2021/22 tax year was £16.7 billion across 394,000 UK taxpayers, a 15% increase on the previous year.
And, earlier this year, the government reduced the CGT annual exempt amount – the amount of tax-free profit you can derive from your assets – to £6,000. This figure will halve again to just £3,000 in the 2024/25 tax year, meaning the number of people liable for the tax could increase yet further.
Keep reading to learn how the reduced annual exempt amount could affect your finances in the coming years and discover five ways you can reduce how much CGT you pay.
The government announced that the annual CGT exempt amount will halve from 6 April 2024
You may be liable to pay CGT on the profits from the disposal or sale of assets such as:
- Shares and funds (unless you hold them in a pension or ISA)
- Valuable possessions sold for more than £6,000
- A business
- Second or buy-to-let properties.
However, before any gains become liable for CGT, you benefit from an annual exempt amount that allows you to derive a certain amount of tax-free profit first.
In April 2023, the government reduced this threshold from £12,300 to £6,000. This amount will halve again from April 2024, reducing to £3,000. At this point, it will then freeze.
Higher- and additional-rate taxpayers will continue to pay a CGT rate of 20% on gains that exceed the annual exempt amount. This is for all assets except property, where gains attract a CGT rate of 28%.
Meanwhile, basic-rate taxpayers will likely pay 18% on gains from residential property and 10% on any gains from other chargeable assets.
With that in mind, read five simple ways you can reduce how much CGT you may have to pay.
1. Make the most of your CGT annual exempt amount
With the CGT threshold halving again in 2024, you may want to make sure that you’re taking full advantage of your current annual exempt amount of £6,000.
Realising gains each year within this threshold can maximise the tax-free profits you make.
It isn’t possible to carry forward your allowance to a subsequent year, so using all of your available exemption could help to mitigate against any liability.
2. Offset any profits by reporting any eligible losses
With CGT only charged on the profits you make when you sell assets exceeding your annual exempt amount, you can offset losses against any gains made in a tax year.
Consequently, you could lower your CGT liability as a result.
You can bring forward any unused losses from previous tax years if you report them to HMRC within four years from the end of the tax year in which you sold the asset.
3. Work with your spouse or civil partner
If you’re married or in a civil partnership, you could take advantage of your ability to transfer assets between you.
Transfers between spouses and civil partners are typically exempt from CGT, so it may be worth transferring some CGT-liable assets to your husband, wife, or civil partner.
This effectively allows you as a couple to double your tax-free gains by making use of both of your exemptions. It’s important to note that any transfer must be a genuine and outright gift.
4. Maximise your ISA contributions
Another option for you to consider is investing in an ISA. Gains made on money invested in an ISA are not subject to CGT, making them a tax-efficient way to build wealth.
You can invest up to £20,000 in the 2023/24 tax year (£40,000 for couples) and you won’t pay any Income Tax or CGT on the proceeds.
Having an ISA may also simplify your tax return, as most people don’t need to report the income and gains from their ISAs.
If you are a higher- or additional-rate taxpayer, these perks could be especially appealing, as you could continue investing while being protected from the higher 20% CGT rate.
5. Move down to a lower Income Tax band
As of the 2023/24 tax year, the rate of CGT you pay is dependent on your Income Tax band. This means that taking steps to move into a lower Income Tax bracket could help you potentially reduce your CGT liability.
A simple and effective way of accomplishing this is by maximising your pension contributions.
By doing so, you could:
- Reduce your taxable income and potentially move into a lower Income Tax band
- Lower your CGT liability
- Boost your long-term savings
- Give you added stability and security in retirement.
You can receive Income Tax relief on contributions up to the Annual Allowance, which has risen to £60,000 (or 100% if earnings are below this threshold) for the 2023/24 tax year.
Get in touch
If you’re looking to find any tax-efficient ways of protecting your wealth, either for yourself or your loved ones, speak to us.
As professional financial planners, we will help you identify your financial goals and how much you need to achieve them and act as a sounding board for all your financial decisions.
Please email admin@stonegatewealth.co.uk or call 01785 876222.
Please note
This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
Investments carry risk. The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
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