According to a recent Institute for Fiscal Studies (IFS) report, stealth tax rises and government threshold freezes are set to raise an extra £52 billion a year for the Treasury between now and 2027.
The report also claims that the UK is currently in a “horrible fiscal bind” that leaves “no room for manoeuvre”. Or, to put it another way: there are no tax cuts on the horizon.
One particular area of concern for your investment or property portfolio might be Capital Gains Tax (CGT), especially in light of recent proposed threshold changes.
Keep reading to find out about the latest changes to CGT and how you might mitigate their effects.
CGT is payable on the gains you make beyond your annual exempt amount
You pay CGT when you sell or “dispose of” certain assets for a profit.
The tax you pay is based on the size of the gain (not the value of the disposal) and the rate you pay depends on the assets disposed of.
There is generally no CGT to pay on gains made in an ISA, government gilts, or Premium Bonds. You also won’t pay on gifts to your spouse, civil partner, or a charity.
You do, though, pay CGT when you sell chargeable assets including:
- Personal possessions (including jewellery, paintings, and antiques but not your car) worth £6,000 or more
- Property that’s not your main home
- Shares that are not held in an ISA or a PEP
- Business assets.
The £6,000 figure for personal possessions is based on your CGT annual exempt amount. This previously stood at £12,300 for the 2022/23 tax year and was also due to be frozen at that rate until 2026. This would have raised additional tax for the government as the price of assets increased during that time.
Jeremy Hunt, though, used his 2022 Autumn Statement to more than half the exempt amount – to £6,000 – and it is due to fall further. It will drop to just £3,000 in April 2024.
These drops to the threshold could make a huge difference to the amount of CGT you pay.
MoneyAge recently confirmed that CGT cost UK taxpayers £16.7 billion during 2021/22, 15% more than the previous year. The Office for Budget Responsibility (OBR), meanwhile, predicts that 2023/24 will see CGT receipts hit £17.8 billion.
3 ways to lower your potential CGT liability
As we have said, you only pay tax on the gain you make, not the value of the disposal. But the drop in thresholds could see you paying an increased amount of tax.
The rate you pay is based on your marginal rate of Income Tax, so you’ll pay:
- 10% as a basic-rate taxpayer (or 18% when selling a qualifying residential property)
- 20% as a higher- or additional-rate taxpayer (or 28% when selling a qualifying residential property).
There are, though, some ways to mitigate the effect of a CGT liability and lower the amount of tax you pay.
1. Remember that the exempt amount is annual so time your disposals carefully
If you are looking to dispose of an asset that has made a large gain, think carefully about when you sell it.
Calculate the gains you’ve already made in a given tax year and delay the sale to a new tax year if it helps you make full use of your exempt amount. If you’re selling a certain number of shares, for example, you might sell half now and wait until the new tax year to sell the rest. This halves the gain and could mean you have no CGT in this tax year or the next.
2. Be sure to make use of your partner’s annual exempt amount if they don’t use all of theirs
You can usually transfer assets to your spouse or civil partner without paying CGT.
If you’re close to your CGT annual exempt amount for a given tax year, consider a transfer. CGT on disposal will be based on the value of the asset when you owned it, but your partner might have more of their exempt amount left to play with.
The CGT rate is also based on the marginal rate of the seller, which could be useful if your partner is in a lower tax band than you.
3. Offset losses to lower your CGT bill
You can register losses from a disposal with HMRC and use them to offset any future gains (though usually only ones made in the same tax year).
If offsetting drops your total gains below the exempt amount you can carry additional losses over to a future tax year.
Speak to us if you think this might be an option for you as the rules can be complicated.
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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.