Capital gains tax (CGT) is a complicated area of tax and one that a lot of people don’t come across often unless you are a regular investor. So, what is capital gains tax and how to pay less?
When individuals or trusts sell or gift an asset, they typically pay taxes on any profit or gains. An asset can include shares, property, or other possessions. Some assets like shares held in an ISA, your home, items valued at less than £6,000 and cash are exempt from this rule.
Depending on your residency status and the assets you hold, the tax treatment in the UK may vary. Residence and domicile are specialist topics, and we are not proposing to cover these in this blog post.
What’s happened recently with CGT?
Capital gains tax in actual terms has increased from just over £2bn in 1999 to just over £18bn in the last tax year (Office of Budget Responsibility March 2023 Economic Outlook). Although CGT receipts fell after the financial crisis of 2008 it more than doubled in the ten years following 2009-2010 as growth returned.
In recent years government policy has been to increase capital taxes whether this be CGT or Inheritance Tax. They began by first freezing the allowances and then in 2022 the CGT allowances were greatly reduced.
Autumn Statement 2022 announced that the tax-free amount that we all receive will be greatly reduced.
To put this in context, here are the CGT tax free bands for the last six years.
| 2023/24 | 2022/23 | 2021/22 | 2020/21 | 2019/20 | 2018/219 | |
| Annual Exemption | £6,000 | £12,300 | £12,300 | £12,300 | £12,000 | £11,700 |
| Trusts | £3,000 | £6,150 | £6,150 | £6,150 | £6,000 | £5,850 |
It was also announced that the rate will further reduce to £3,000 for individuals and £1,500 for trusts. So, as you can see the intention clearly is to raise more CGT.
What’s more, from April 2020, HM Revenue and Customs also want their money earlier and not wait for the Self-Assessment payment date. You need to report any gains you make on property within 60 days of disposal.
This doesn’t really leave you a lot of time to get the paperwork done, apply to HMRC, submit the calculations, and pay the tax. For a lot of people, it can be a cause of stress and anxiety. People get worried and concerned about deadlines and making sure the calculations are correct. If it’s not something you do every day, it can be quite daunting.
If you find yourself in a situation like this where you have sold a second property, you just need to appoint a good accountant who can do the work for you. It’s faster and less stressful and doesn’t cost the earth.
Remember your main home where you live is most likely going to be exempt from CGT. The only time you need to worry is if you have let that property out at some stage or if the property has more than an acre of land.
One thing a lot of people forget about is gifts. If you give away any assets whether it is for free or for a reduced price, chances are CGT needs to be paid. So, seek professional advice and do it quickly.
The only gifts that are exempt are the ones given to registered charities.
How to pay less CGT
We know that CGT is likely to be paid by more of you especially if you are investing in stocks and shares. So what can you do to reduce your liability?
Let us first tell you how much tax you would pay. It depends on whether you are a higher/additional rate taxpayer or a basic rate taxpayer.
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Basic rate taxpayer
- 10% on gains of more than £6,000 in 2023/24 on qualifying disposals
- 18% on gains of more than £6,000 in 2023/24 on residential property
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Higher or Additional rate taxpayer
- 20% on gains of more than £6,000 in 2023/24 on qualifying disposals
- 28% on gains of more than £6,000 in 2023/24 on residential property
Here’s 5 ways to reduce your exposure to CGT:
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Use your CGT allowance each year because it can’t be carried forward
Although drastically reduced you still have £6,000 in the current year. If don’t use it you lose it.
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Transfer some assets to your spouse or civil partner prior to selling
Any transfers between a married couple or civil partners are exempt. What this means is you could give some of your assets prior to selling and they’d sell it on. This way you get two lots of the annual exemption.
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Make your investments via ISA’s
Any gain you make on investments held within an ISA is exempt from CGT. It makes complete sense to make use of your ISA allowance each year. The allowance in the current tax year is £20,000 for everyone over the age of 18.
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Invest in Enterprise Investment Scheme (EIS) or Seed EIS
Firstly, any gains from shares in an EIS are free from CGT.
What’s more, if you sell other assets and invest in an EIS scheme, you could be entitled to capital gains tax deferral relief which gives you a huge cash-flow advantage
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Giving to charities
Gifts of certain assets namely property, land, or qualifying shares are all exempt from CGT. To qualify the shares generally speaking are those listed on the stock exchange or the alternative markets.
There are of course other avenues and if you want to learn more about how we can help you save tax get in touch at www.myersclark.co.uk
Capital taxes are here to stay, for a while at least. According to the Office for National Statistics, the government debt is now over 100% of annual national income. This means tax is not coming down any time soon.
If you have any questions about any topics covered here, please email your normal client manager. If you are not a client, you can find out more about how we work here