If you’ve spent considerable time investing for the future so that you can enjoy your dream lifestyle, seeing your funds diminish due to a hefty tax bill might feel frustrating.
Indeed, if you sell or dispose of certain assets that have increased in value, you could face a Capital Gains Tax (CGT) bill. According to the most recent figures published by HMRC, the number of people paying CGT increased by 20% in the 2021/22 tax year.
This may be partly due to cuts in the Annual Exempt Amount – a cap on the amount of gains you can make before you pay CGT.
In the 2022 Autumn Statement, chancellor Jeremy Hunt announced that the CGT annual exempt amount would fall from ÂŁ12,300 to ÂŁ6,000 from 6 April 2023. This was further reduced from ÂŁ6,000 to ÂŁ3,000 from 6 April 2024.
So, if you’re concerned about keeping your investments as tax-efficient as possible, read on to learn how you could reduce a potential CGT bill.
Sell your assets gradually to avoid exceeding the Annual Exempt Amount
CGT may be payable on the gains you make on “chargeable assets”, including:
- Property that isn’t your main home
- Investments that you hold outside of an ISA
- Personal possessions worth more than ÂŁ6,000.
However, you’ll usually only have to pay CGT on gains that exceed your Annual Exempt Amount.
Unfortunately, as outlined above, the Annual Exempt Amount has been reduced from ÂŁ6,000 to ÂŁ3,000 for the 2024/25 tax year.
What’s more, you can’t carry forward any unused allowance from one tax year to the next. So, if you want to reduce a potential CGT bill, it might be worth considering crystallising gains gradually over several years.
By keeping your gains from selling or disposing of chargeable assets below the Annual Exempt Amount each year, you could avoid a CGT bill.
Make use of tax-efficient investment options such as ISAs
You can add up to ÂŁ20,000 (2024/25) to your ISAs in a single tax year. You pay no Income Tax on the interest or dividends you receive from an ISA and any profits from investments are free of CGT.
In addition to these tax efficiencies, the government introduced several changes for the 2024/25 tax year that offer you greater flexibility in how you manage your ISA subscriptions. These include:
- The option to pay into multiple ISAs of the same type
- and the ability to make partial transfers between providers.
So, ISAs may offer you a flexible way to save and invest tax-efficiently. Indeed, by using your full ISA allowance each year, you could potentially shield more of your wealth from CGT.
Additionally, if you have a spouse or partner, you could combine your ISA allowances, enabling you to save up to ÂŁ40,000 tax-efficiently in the 2024/25 tax year.
You might want to consider moving any investments you hold in taxable accounts, such as a General Investment Account (GIA), into an ISA to protect them from CGT. While you can’t move these funds directly into an ISA, you could use a “Bed and ISA” strategy to sell your investments and buy them back inside an ISA wrapper. Remember that the annual ISA subscription limit will apply, and you may incur some charges for selling and rebuying shares.
It’s important to note that ISA investments will usually form part of your estate for Inheritance Tax (IHT) purposes. So, your beneficiaries may have to pay IHT on your savings after you’re gone.
Read more: What will happen to your investment portfolio when you die?
Gift assets to a spouse or partner
You could potentially reduce a CGT bill by giving an asset to your spouse or civil partner, as this type of transfer is usually free from CGT.
Gifting assets in this way also allows you each to make full use of your individual Annual Exempt Amount and potentially reduce the CGT you’ll pay as a couple.
Even where CGT can’t be avoided altogether, an inter-spouse transfer may help to reduce your CGT bill if your spouse or civil partner pays a lower rate of Income Tax than you.
Basic-rate taxpayers pay CGT at a rate of 10% (or 18% on residential property), whereas higher- or additional-rate taxpayers will pay 20% (or 24% on residential property).
However, it’s worth bearing in mind that once you gift an asset to your partner, you will no longer be the legal owner of the asset.
Increase your pension contributions
As CGT is calculated based on your Income Tax as explained above, you might want to consider paying more into your pension to reduce your taxable income.
This could mean that you fall into a lower Income Tax band and may pay a lower rate of CGT.
Just remember that you may pay Income Tax when you withdraw money from your pension if your total income exceeds the Personal Allowance of ÂŁ12,570 (2024/25).
Offset losses against gains
In some cases, you might be able to offset any losses you make when selling or disposing of assets against your gains.
By offsetting your losses against gains, you could reduce the amount of gain that is subject to tax.
You may also be able to carry forward any unused losses from previous years, provided that you report these to HMRC within four years from the end of the tax year in which you disposed of the asset.
A financial professional can help you make a long-term plan for when and how to dispose of certain assets in the most tax-efficient way.
Get in touch
If you’d like to learn more about keeping your Capital Gains Tax bill as low as possible, we can help.
Please email us at mail@delaunaywealth.com or call 0345 505 3500.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients 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 or tax planning.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
The value of your investments (and any income from them) 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.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
Production
