Benjamin Franklin, the famed inventor and politician, once said: “In this world nothing can be said to be certain, except death and taxes”.
Every year millions of Brits face up to the approaching end of the tax year and assess their potential tax obligations.
One particular tax headache that bears additional consideration in 2023 is Capital Gains Tax (CGT). Allowances are changing going into the 2023/24 tax year and offer a rapidly shrinking window to take advantage of current CGT rules.
Read on to discover how CGT allowances are changing in the new tax year and three clever ways your clients can reduce their CGT obligations in 2023.
The chancellor has opted to reduce the annual CGT exempt amount from April 2023
As part of his autumn statement announcement, the chancellor, Jeremy Hunt, outlined plans to reduce the CGT annual exempt amount from £12,300 to £6,000 from April 2023. It will be halved again from April 2024 to £3,000 and frozen thereafter.
These reductions will affect trusts as well as individuals.
CGT rates above the threshold will remain the same in the new tax year
CGT rates differ from Income Tax rates and are divided into two categories — basic- and higher-/additional-rate taxpayers.
The basic rate remains at 18% on residential property gains and 10% on all other assets, while they stay at 28% and 20% for those in the higher- and additional-rate brackets.
Assets and investments that you typically might have to pay CGT on include:
- Second properties or buy-to-let
- Shares and funds (unless they’re held in an ISA or pension)
- The sales of a business
- Valuable possessions sold for more than £6,000.
CGT cannot be offset by any unused personal allowances, which particularly becomes a factor with the lowered annual exempt amount.
CGT changes will expose thousands of Brits to potential liabilities
According to the Office for Tax Simplification (OTS), the changes will likely see 225,000 people forced to undergo self-assessment for the first time upon the reduction to the £3,000 threshold in April 2024. Another 110,000 will also now have to complete the CGT section of their tax return.
HMRC goes even further with its estimates and reports that 500,000 individuals and trusts could be affected in the 2023/24 tax year with 260,000 brought into the scope of CGT by the 2024/25 tax year.
Dealing with CGT in a tax return can be an arduous and time-consuming task, which will be an unwanted burden for many of your clients to undertake, not to mention any financial considerations.
3 clever ways for your clients to reduce their CGT and take advantage of current allowances before April 2023
1. Your clients could try and maximise the use of their allowances
It is important that your clients consider utilising the full value of their CGT annual exempt amount. The allowance can’t be carried forward from one tax year to the next and will also be reduced in value from the 2023/24 tax year onwards.
It is also important that your clients consider strategic ways to maximise the use of their allowances. For example, selling assets and making a gain up to £12,300 before 5 April 2023 could see clients make this most of the annual exempt amount before it reduces.
This may also involve making use of losses. Gains and losses from the same tax year need to be offset against each other, which can reduce the amount that is subject to CGT.
Unused losses from previous years can also be brought forward, provided they are reported to HMRC up to four years from the end of the tax year in which the asset was sold.
Alternatively, if your clients are married or in a civil partnership, they could take full advantage of any remaining value on their partner’s unused exemption by transferring over any CGT-liable assets.
2. Your clients could seek to manage their taxable income levels
Since the rate at which your clients are required to pay CGT is dependent on their Income Tax band, reducing their Income Tax rate could have the added benefit of reducing their CGT obligations.
Your clients could opt to reduce their taxable income by deciding to allocate more towards their pension contributions or alternatively by considering making charitable donations.
Pensions are an incredibly tax-efficient method of saving and your clients could see associated tax relief dependent on their Income Tax bracket.
This relief is available up until the Annual Allowance is met, which stands at £40,000 (or 100% if earnings are below this threshold) for the 2022/23 tax year.
Research from the Social Market Foundation reports that, on average, individuals in the UK who are approaching retirement are expected to have a £250,000 shortfall on the size of pension pot needed to meet their desired retirement goals.
So, increasing their pension contributions could have significant benefits for your clients’ tax liabilities in the short term and retirement options in the long term.
3. Your clients could consider investing through a Stocks and Shares ISA or Enterprise Investment Scheme
Stocks and Shares ISAs and Enterprise Investment Schemes (EIS) offer some useful tax benefits that could reduce your clients’ CGT.
Any gains and losses made on investments held within a Stocks and Shares ISA are exempt from CGT, so this method could be especially appealing for taxpayers on higher Income Tax rates.
ISAs have an annual allowance, which is £20,000 for the 2022/23 tax year, or effectively £40,000 for married couples or civil partners.
Meanwhile, any gains made on investments in an EIS are free from CGT, as long as the investment is held for three or more years.
An EIS is a form of government-supported programme that seeks to help small-scale, fledgling businesses find investment. Investors in an EIS can benefit from the associated tax relief on their investment.
The downside of EIS is that these types of schemes are exposed to a greater risk of failure and potential for losses than traditional investments. So, pursuing EIS as a way of offsetting CGT should only be considered if it aligns with your clients’ tolerance for risk.
Get in touch
There are plenty of options available to your clients to ensure their plans are executed as tax-efficiently as possible. If your clients have any concerns about their potential liabilities, they should contact us by email at firstname.lastname@example.org or call us on 0345 505 3500.
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.
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. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.
Workplace pensions are regulated by The Pension Regulator.
Enterprise Initiative Schemes (EIS) and Venture Capital Trusts (VCT) are higher-risk investments. They are typically suitable for UK-resident taxpayers who are able to tolerate increased levels of risk and are looking to invest for five years or more. Historical or current yields should not be considered a reliable indicator of future returns as they cannot be guaranteed.
Share values and income generated by the investments could go down as well as up, and you may get back less than you originally invested. These investments are highly illiquid, which means investors could find it difficult to, or be unable to, realise their shares at a value that’s close to the value of the underlying assets.
Tax levels and reliefs could change and the availability of tax reliefs will depend on individual circumstances.