Capital Gains Tax was hiked in the 2024 Budget as feared, although rates remain the same for anyone selling residential property.
Landlords in the UK have been selling up in record numbers in recent months, according to property website Rightmove, possibly driven by speculation that CGT rates would jump following the Budget on October 30. Fortunately, however, rates are unchanged for residential property at 18% for basic rate taxpayers and 24% for higher rate taxpayers. However, for other assets, the CGT rate has risen from 10% to 18% for basic rate taxpayers and from 20% to 24% for higher rate taxpayers so it now aligns with property rates.
This increase is a bitter blow for those planning to sell assets imminently, especially given recent reductions in the CGT allowance. Over the course of the past two years, this allowance – also known as the Capital Gains Tax Annual Exempt Amount – has decreased by over 75%. This has meant that an estimated quarter of a million investors have been pulled into paying Capital Gains Tax (CGT) for the first time, according to investment experts AJ Bell, and those who were already paying will have to cough up even more.
Read on to find out a few ways you might be able to mitigate the impact of higher tax rates and legitimately shield your gains from the taxman.
Contents
- When do I need to pay Capital Gains Tax?
- Have you made the most of your annual ISA allowance?
- Could you take advantage of Bed and ISA rules?
- Consider deferring capital gains to the new tax year if you think you’ll pay a lower rate
- Think about transferring assets to your spouse
- Remember to report your losses too
- Consider boosting your pension contributions
- Could Enterprise Investment Schemes or Venture Capital Trusts be right for you?
When do I need to pay Capital Gains Tax?
Capital Gains Tax (CGT) must be paid whenever you sell or dispose of an asset, such as a property or investments, and you make a profit doing so.
As mentioned, there is a certain amount of money you can make before it starts being subject to taxation. In the 2022/23 tax year, this Annual Exempt Amount was a considerable £12,300. However, it was cut by over half to £6,000 for the 2023/24 tax year, and then again to £3,000 at the start of the 2024/25 tax year.
The rates that you pay in Capital Gains Tax are decided by which Income Tax bracket you fall into, but are not the same as Income Tax rates, and vary depending on what you are selling.
Under the new rules introduced in the Budget, higher and additional rate taxpayers automatically pay 24% CGT on assets including residential property gains. Basic rate taxpayers add their capital gains (after applying their allowance) to the rest of their taxable income that year (after applying their £12,570 personal allowance and any other tax relief), and pay 18% on any gains that still fall within the basic rate band. However, any portion that crosses over into a higher band will be charged at the higher rate instead. You can read more in our article What is Capital Gains Tax and how do I pay it?
Below are some ways you may be able to beat the Capital Gains Tax hikes announced in the Budget through clever financial planning. Remember however, that tax rules are complicated, so it’s well worth seeking professional financial advice if you’re unsure how best to proceed.
1. Have you made the most of your annual ISA allowance?
An individual savings account (ISA) is a unique type of account that effectively acts as a tax-efficient “wrapper” for your money, so any gains are free from both income tax and Capital GainsTax
Wealth manager Bestinvest claims that speculation Chancellor Rachel Reeves would target CGT in her maiden fiscal statement resulted in ISA contributions surging by 156% in September compared to the same month in 2023, with contributions in the first 11 days of October exceeding the full month a year earlier.
This year you can pay up to £20,000 into cash, stocks and shares or innovative finance ISAs which invest in peer-to-peer lending). The Chancellor confirmed in the Budget that this allowance would remain frozen at this level until April 2030. You can contribute to as many of the same type of ISA as you want, as long as you don’t breach your allowance. Learn more about how ISAs work in our guide Everything you need to know about ISAs.
2. Could you take advantage of Bed and ISA rules?
If you have investments held outside of an ISA then you could potentially benefit from opening a stocks and shares ISA and transferring them in to protect them from income tax and Capital Gains Tax when you come to sell your investments.
You can do so using what is known as a Bed and ISA service, which may be provided by the platform that you currently hold your investments with. This essentially means you instruct the company to sell your investments and then immediately buy them back on your behalf within an ISA structure, though it will usually have to be an ISA provided by the same company. You can learn more about how this works in our article What is a Bed and ISA?
If you already have ISAs open, make sure that you don’t exceed your yearly ISA allowance by using Bed and ISA. You can’t carry your ISA allowance into the next tax year, but if you act both before and after the tax year changes in April, you will effectively have £40,000 of ISA allowances at your disposal.
3. Consider deferring capital gains to the new tax year if you think you’ll pay a lower rate
If you’re expecting your income to fall next tax year, perhaps because you’re due to retire then, you might want to think about deferring any capital gains until then.
4. Think about transferring assets to your spouse
You don’t have to pay Capital Gains Tax on assets transferred to your spouse. So, if your spouse hasn’t used any of their Annual Exempt Amount or ISA allowance, and are in a lower tax band than you are, you might want to consider transferring some of your assets to them to keep tax bills to a minimum when these assets are sold.
For example, if your spouse is in the basic rate income tax bracket and you’re a higher rate taxpayer, even if they do go over their allowance when selling the assets, they will still end up handing less money over to the taxman as a result.
5. Remember to report your losses too
They say every cloud has a silver lining, and this is even true when it comes to losses incurred on your investments – that is, when you sell something for less than you originally bought it.
Any losses can be deducted from your gains when calculating Capital Gains Tax. These losses can either be from the same tax year, or you can carry forward losses from previous years to use in the present, as long as you register them with HMRC within four years of the end of the tax year in which the sale was made.
So, even if your gains from selling one asset take you over your annual tax-free threshold, subtracting a previous loss from this total might take you back under it again, or at the very least reduce the taxable amount.
6. Consider boosting your pension contributions
One way to reduce any potential Capital Gains Tax bill is to simply look at ways to lower the tax band you fall into. For example, if you are paid enough to just fall into the higher earnings tax band, you could consider increasing the amount you pay into your pension each year, so that you then fall into the basic rate of income tax.
Bear in mind that even if you are a basic rate taxpayer, you still may have to pay higher rate CGT on a portion of your capital gains if, when combined with your yearly income, they exceed the higher rate threshold. It’s therefore vital to make sure you do your maths carefully to work out whether the tax savings are worth it, and seek professional financial advice if you’re unsure.
Also remember that higher and additional rate taxpayers pay the same Capital Gains Tax rates, so there is no benefit to using pension contributions to lower your tax bracket from additional rate to higher rate as far as CGT is concerned.
Finally, be conscious of pension allowances so you avoid overpaying into your pension, as you’ll be charged and may lose out on tax benefits if you do so. Read more about these in How do pension allowances work? If you have used your full £60,000 Annual Allowance for the year or cannot pay into your pension for any other reason, charitable donations may be another way to lower your taxable income.
If you’re considering seeking professional financial advice on the options available to you, we’ve partnered with nationwide independent advice firm Fidelius to offer Rest Less members a free initial consultation with a qualified financial advisor. There’s no obligation, however if the adviser feels you’d benefit from paid financial advice, they’ll talk you through how that works and the charges involved.
Fidelius are rated 4.7 out of 5 from over 1,500 reviews on VouchedFor, the review site for financial advisors.
7. Could Enterprise Investment Schemes or Venture Capital Trusts be right for you?
Taxpayers may be considering an investment in Venture Capital Trusts or Enterprise Investment Schemes as a way to reduce their tax burden ahead of an expected increase in CGT in the Budget. However, these are definitely not for the faint-hearted as they are specialist, high risk investments, nor are they for novice investors.
Enterprise investment schemes (EIS) are tax-efficient structures that enable you to put money into what are called ‘qualifying’ companies. These are often start-up businesses or younger companies that may have found it hard to raise funding elsewhere.
Investors can claim up to 30% income tax relief on EIS investments, and when you sell EIS shares, any growth in value from your investment is 100% tax-free. Investors have to hold shares for at least three years and the company must remain EIS-qualifying for this period. If not, you’ll have to pay tax relief back to HMRC.
Venture Capital Trusts (VCTs) meanwhile, are stock exchange listed funds that invest in small, innovative companies, and are again exempt from Capital Gains Tax when you sell them. Investors can also claim 30% income tax relief. However, to benefit from these reliefs, shares must be held for a minimum of five years.
There are significant risks involved in investing in both EIS investments and VCTs, so it’s essential to do plenty of research first, and to seek professional financial advice if you’re not sure whether such high risk options are right for you. For example, you should only choose VCT managers that will buy back your shares if you need to sell them in an emergency, although remember that if you do this before the five year period is up, you’ll lose any tax relief.
Adam Canavan, financial planner at Bowmore, said: “With CGT rising sharply in the Budget we expect that VCTs will surge in popularity. VCTs can play an important role in tax planning strategies, but only if investors really do their due diligence.”
“The tax reliefs on VCT funds are now even more attractive following the Budget. But it’s important not to let the tax tail wag the investment dog – you should only invest in a VCT fund once you have done your due diligence on the manager and the fund’s investments.”
A final thought…
With Budget changes only having been recently announced, it’s important not to rush into any financial decisions without giving them careful consideration first.
If in doubt, speak to a financial advisor who will be able to recommend the best course of action based on your individual circumstances.
You can find a local financial advisor on VouchedFor or Unbiased, or for more information, check out our guide on How to find the right financial advisor for you.
If you’re thinking about getting independent financial advice, financial services company Fidelius is offering Rest Less members a free initial consultation with an independent financial advisor to chat about your finances, where you are now, and where you want to go.
There’s no obligation, but if they feel you’d benefit from paid financial advice, they’ll go over how that works and the charges involved. Fidelius is rated 4.7/5 from over 1,250 reviews on VouchedFor, the review site for financial advisors.
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