Cuts to the capital gains tax (CGT) exemption mean that arranging your investments as tax efficiently as possible is more important than ever.
Previously, investors could make tax-free gains of up to £12,300 a year, but this exemption has been slashed to £6,000 for the 2023/24 tax year and is due to be cut again to £3,000 in 2024/25.
Higher and additional-rate taxpayers will pay CGT at 20% on gains that exceed the exemption, rising to 28% if the gains are from residential property. For basic-rate taxpayers, these rates are 10% and 18%, respectively.
There are lots of ways to reduce CGT, ensuring more of your money goes towards your future. However, CGT can be highly complex and, without expert advice, there’s a risk you could end up paying it unnecessarily. Here are some ways to potentially reduce your capital gains tax liability.
1. Use your CGT exemption
Everyone has an annual CGT exemption, which enables you to make tax-free gains of up to £6,000 in the 2023/24 tax year. This can’t be carried forward into the next tax year. So even though the allowance is less generous than in the past, making full use of it each year could reduce the risk of incurring a significant CGT liability in the future.
2. Make use of losses
You might be able to minimise your CGT liability by using losses to reduce your gain. Gains and losses realised in the same tax year must be offset against each other, which can reduce the amount of gain that is subject to tax. Unused losses from previous years can be brought forward, provided they are reported to HMRC within four years from the end of the tax year in which the asset was disposed of.
3. Transfer assets to your spouse or civil partner
Transfers between spouses and civil partners are exempt from CGT, which means assets can be transferred from one partner to the other to use each person’s annual CGT exemption. This effectively doubles the CGT exemption for married couples and civil partners. The transfer must be a genuine, outright gift.
4. Invest in an ISA / bed and ISA
Gains (and losses) made on investments held within an ISA are exempt from CGT, so it makes sense, particularly for higher and additional-rate taxpayers, to use your ISA allowance each year. In the 2023/24 tax year, you can invest up to £20,000 in an ISA. For married couples and civil partners, the ISA allowance effectively doubles to £40,000.
There is also a tactic called ‘bed and ISA’, which involves selling investments to realise a capital gain and then immediately buying back the same investments inside an ISA. This enables all future gains on the investment to be CGT free.
Bear in mind that you may pay stamp duty and other costs when repurchasing investments in an ISA and there is a risk that time out of the market, however small, will detrimentally impact your investments. If you’re unsure, speak to a financial adviser.
5. Contribute to a pension
Making a pension contribution from relevant earnings could help you save on CGT because it effectively increases the upper limit of your income tax band. If, for example, you made a gross pension contribution of £10,000, the point at which higher-rate tax becomes payable would rise from £50,270 to £60,270 (2023/24 tax year). If your capital gain plus other taxable income fell within this extended basic-rate income tax band, CGT would be payable at 10% instead of 20%.
6. Give shares to charity
If you give land, property or qualifying shares to a charity, income tax relief and CGT relief are available.
7. Invest in an Enterprise Investment Scheme
Any gains that are made on investments in an EIS (Enterprise Investment Scheme) are free from CGT if held for three or more years.
You might be able to defer a capital gain by investing that gain in an EIS qualifying company, but only if the investment is made one year before or up to three years after the gain arose. The deferred capital gain will come back into charge once you take your money out of the EIS qualifying company.
The downside of EIS is that these schemes are higher risk than traditional investments and can be harder to sell, so are not appropriate for all investors.
8. Claim gift hold over relief
Gift hold over relief could be available if you give away certain business assets or sell them for less than they are worth to help the buyer. If you’re eligible, you won’t pay CGT when you give away the assets, but the person you give them to might be liable for CGT when they sell them. You must meet several eligibility conditions, so if you’re unsure speak to a professional adviser.
9. Chattels that escape CGT
Gains on possessions such as antiques and collectibles, called ‘chattels’, may be tax free. For example, items with a predictable life of 50 years or fewer, known as ‘wasting assets’, are CGT free, provided they were not eligible for business capital allowances. Wasting assets include antique clocks, vintage cars, pleasure boats and caravans.
For non-wasting chattels, like paintings and jewellery, the CGT position depends on the sale proceeds, with those £6,000 or under usually being exempt.
10. Seek professional advice
CGT is a complicated subject, so make sure you seek professional advice. An adviser will make sure you’re maximising all your tax reliefs, allowances and exemptions, explain your options, and advise on the best course of action for your individual circumstances.
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The value of investments, and any income from them, can fall and you may get back less than you invested. This does not constitute tax or legal advice. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future. Information is provided only as an example and is not a recommendation to pursue a particular strategy. Information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness.