HMRC collects a record amount in Capital Gains Tax. Here’s how you could manage your liability
October 2023
The latest release from HMRC shows it collected a record £16.7 billion in 2021/22 through Capital Gains Tax (CGT) – a 15% increase on the previous tax year. Cuts to a tax exemption could mean CGT receipts might climb even further.
CGT is a type of tax you pay when you sell or dispose of certain assets. It may include property that isn’t your main home, some investments that are held outside of an ISA, or personal possessions that are worth more than £6,000.
Previously, the annual exempt amount – the threshold up to which you can generate profits before CGT is due – was £12,300. However, the exemption fell to £6,000 in 2023/24 and will be just £3,000 in 2024/25.
So, while the value of your assets may rise, the amount of profit you can make before CGT is due is falling. It could mean more individuals face a CGT bill or that your liability may be higher than you expect.
Yet, some steps might help you manage your CGT bill.
5 useful options that could reduce your Capital Gains Tax bill
1. Use your annual exempt amount
Keeping your annual exempt amount in mind when planning how to dispose of assets could be useful.
For example, if you plan to sell two assets and the profits would exceed the CGT threshold, delaying the sale of one until a new tax year when your annual exempt amount resets could reduce your bill.
If you’re married or in a civil partnership, you can also transfer assets to your partner without being liable for CGT. As a result, transferring assets to your partner could allow you to use both of your annual exempt amounts.
2. Consider tax-efficient wrappers and allowances
There are ways to hold assets tax-efficiently, which could mean you avoid CGT or potentially reduce your bill.
If you’re investing, an ISA could be one such option. Investments held in an ISA aren’t liable for CGT when you sell them or Income Tax when you withdraw your money.
A pension may be another option if you’re investing for the long term. A pension is a tax-efficient way to invest. However, you may need to pay Income Tax when you withdraw money from your pension if your total income exceeds the Personal Allowance.
There may be other allowances and tax-efficient wrappers that are suitable for you too.
3. Manage your taxable income
The CGT rate depends on your other taxable income. If you’re not sure what rate of CGT you could pay please contact us. In 2023/24:
- The standard CGT rate is 10% (18% on property that isn’t your main residence)
- The higher CGT rate is 20% (28% on property that isn’t your main residence).
So, if you’re able to reduce your income from other sources, you could potentially halve the rate of CGT you pay.
Whether this is an option will depend on your income and circumstances. For example, if you’re a retiree drawing a flexible income from your pension, you may choose to pause or lower your withdrawals to avoid exceeding thresholds. Or, if you’re an employee, you may increase your pension contributions to reduce your taxable income.
If you want to understand the possible effects of reducing your taxable income, please get in touch.
4. Offset losses against gains
No one wants to make a loss when selling assets, but it could reduce your tax liability. In some cases, it is possible to offset losses against gains to reduce CGT.
For instance, if you sold investments at a loss, you could use this to your benefit from a tax perspective as CGT is charged on your net capital gains during a tax year.
You may also be able to carry forward losses to future tax years. Keeping good records may mean you’re able to use losses against gains in the future.
5. Make Capital Gains Tax part of your long-term strategy
You may want to consider CGT when setting out and reviewing your long-term plan. Understanding when you plan to dispose of certain assets could help you identify ways to reduce the amount of tax you pay.
Contact us if you have questions about Capital Gains Tax
If you’d like to better understand how much CGT you could be liable for or want to make it part of your long-term strategy, please contact us.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
HM Revenue and Customs’ practice and the law relating to taxation are complex and subject to individual circumstances and changes, which cannot be foreseen.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.