Everything you need to know about Capital Gains Tax and how it could affect you

If you’re considering disposing of an asset, be that a property, shares or a valuable personal possession, you need to understand whether you may have a Capital Gains Tax (CGT) liability.

According to the most recent data from HMRC, Britons paid a record £16.7 billion in CGT in 2021/22, which was a 15% increase on the previous year.

And, as the government’s cuts to the “annual exempt allowance” take effect – more about this below – you’re likely to pay more in CGT in the future.

Until April this year, you could make £12,300 in gains from disposing of assets before paying CGT. This has now been cut to £6,000 and is set to fall to £3,000 in 2024.

Despite this cut, there are ways to reduce the sting of your CGT bill. Read on to learn more about how CGT works and for tips to reduce your liability.

UK Capital Gains Tax: The basics explained

CGT is due when you sell or “dispose of” an asset that has risen in value since you bought it. Disposing of an asset includes selling it, giving it away, swapping it or getting compensation for it.

You’ll need to pay tax on the gain you have made, not the amount you sell an asset for. For example, if you buy a buy-to-let property for £300,000 and sell it for £400,000, CGT is potentially due on the £100,000 gain.

A CGT liability could arise if you make a profit on the sale of a second home, shares that are not an ISA or a PEP, business assets or personal possessions worth more than £6,000.

However, some assets are tax-exempt, such as gifts to your spouse or charity, and you only have to pay CGT on gains made above your annual exempt allowance.

Your Capital Gains Tax annual exempt allowance is £6,000 in 2023/24

As of April 2023, your personal CGT annual exempt allowance is £6,000. If your total gains from selling an asset are less than this amount, you won’t have to pay any CGT.

For the 2023/24 tax year, the allowance will fall to £3,000.

So, if you want to take advantage of the higher allowance, now could be a good opportunity to crystallise gains up to this limit.

Capital Gains Tax rates

If you pay basic-rate Income Tax (anyone who earns between £12,570 and £50,270 a year), the amount of CGT you’ll pay will depend on:

  • The size of your gain
  • Your taxable income
  • The type of asset you are selling.

If you’re a basic-rate taxpayer, you’ll pay 18% on any gains made from disposing of residential property and 10% on gains made from other types of assets.

If you’re a higher- or additional-rate taxpayer, these rates rise to 28% and 20% respectively.

5 ways to cut your Capital Gains Tax Bill

1. Take advantage of tax-efficient savings (ISAs)

Any gains you make on savings or investments you hold in an ISA are free of Income and Capital Gains Tax.

By taking full advantage of your annual ISA allowance of £20,000 (2023/24), you could build up a significant tax-free savings pot.

If you have a spouse or partner, you are each entitled to the ISA allowance, so you can effectively double up on your tax-efficient savings.

2. Sell assets gradually

If possible, you could consider staggering the disposal of assets over several years to take advantage of multiple annual exempt amounts.

As the annual CGT exempt allowance continues to drop, this is a savvy way to make the most of your gains.

3. Share assets with your spouse

You don’t have to pay CGT on gifts to your spouse or civil partner.

So, if you share your assets with them, you can take advantage of both your annual exempt allowance and theirs.

4. Offset capital gains with losses and costs

If you lose money on an asset – for example, if shares drop in value or property values fall, don’t forget to offset these against your other gains.

This can have the effect of reducing your overall gains and your CGT bill.

5. Pay more into your pension

CGT rates are calculated based on your Income Tax rate.

By increasing your pension contributions, you could reduce your income, fall into a lower Income Tax bracket, and potentially shrink your CGT bill.

Get in touch

Avoiding or minimising your Capital Gains Tax bill is not always straightforward. Seeking professional advice could be a sensible move that helps you to reduce the amount of tax you pay.

If you’re feeling confused about your Capital Gains Tax obligations or you’re wondering how the recent changes to the CGT allowance might affect you, please reach out. We offer a free initial consultation, so please email us at mail@delaunaywealth.com or call 0345 505 3500.

Please note

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 Financial Conduct Authority does not regulate estate planning, tax planning or will writing.