The maximum amount you can earn tax-free in profit when you sell something was slashed last tax year, and is set for another big cut in April when it will fall from £6,000 to just £3,000.
Over the course of two years, this tax-free allowance – also known as the Capital Gains Tax Annual Exempt Amount – will have decreased by over 75%. While this is not technically a tax hike, as the tax rates you pay remain the same, it does mean that over a quarter of a million investors will be 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.
If changes to the CGT Annual Exempt Amount are poised to affect you, read on to find out a few ways you might be able to mitigate the impact of these cuts and legitimately shield your gains from the taxman.
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.
When do I need to pay Capital Gains Tax?
Capital Gains Tax must be paid whenever you sell or dispose of an asset, such as a property or a share, and make a profit doing so.
However, there is a certain amount of money you can make this way before it starts being subject to taxation – this is your Annual Exempt Amount. In the 2022/23 tax year, this amount was a considerable £12,300. However, it was cut by over half to £6,000 for the 2023/24 tax year, and will shrink to just £3,000 in April when the 2024/25 tax year begins.
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.
Higher and additional rate taxpayers automatically pay 20% CGT on most assets, or 28% on residential property gains (reducing to 24% in April 2024). 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 10% on any gains (or 18% on residential property 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 “hike” through clever financial planning.
1. Make the most of the higher allowance before April
The new 2024/25 tax year starts on April 6, meaning you have a bit of time before the allowance is cut from £6,000 to £3,000. If you’re sitting on an asset that you haven’t sold yet, you might be better off selling it sooner rather than later to take advantage of the higher threshold. You can’t carry over any unused allowance, so once the new tax year starts, the higher allowance will be gone for good.
2. Consider transferring your investments to an ISA
An individual savings account (ISA) is a unique type of account that effectively acts as a tax-efficient “wrapper” for your money.
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. A stocks and shares ISA is a convenient way to hold your investments and pay no tax on the returns, or on the profit from eventually selling these investments. This way, you won’t have to worry about paying Capital Gains Tax or income 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. 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 could 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.
4. 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 HRMC 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.
5. Could you increase your pension contributions?
One savvy way to pay less in Capital Gains Tax is to simply look at ways to lower the tax band you fall into. For example, if you are paid enough to just qualify for 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’ve done your maths 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 Annual Allowance for the year or cannot pay into your pension for any other reason, charitable donations are another way to lower your taxable income.
If you’re considering getting professional financial advice, Unbiased is offering Rest Less members a free pension review. It’s a chance to have a qualified independent financial advisor (IFA) take a look at your pension arrangements and give an unbiased assessment of your retirement savings.
The review is free and without obligation, but if the IFA feels you’d benefit from paid financial advice, they’ll go over how that works and the charges involved.
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