Capital Gains Tax (CGT) is payable upon the disposal of certain assets; for example, shares, property or even antique possessions.
CGT is levied on the difference between what you originally paid for the asset, and what you then go on to sell or dispose of it for – i.e., ‘the gain’ you make.
The rates at which CGT is paid remain unchanged; chargeable assets attract CGT at either 10% or 20% (18%, and 28% for residential property) depending on the income tax band your gains fall within.
What is the CGT annual exempt amount?
Each individual is entitled to an annual exempt amount in respect of CGT, which they can offset against any gains arising in that year. They will pay CGT on any gains exceeding the annual allowance.
So, what’s changed?
Previously, the annual exempt amount each individual was entitled to was £12,300. However, in April 2023, this was reduced by more than half to £6,000.
From April 2024, and for subsequent tax years, the allowance will be reduced and permanently fixed at £3,000.
Bear in mind, trustees are not entitled to the same allowance as individuals and personal representatives. For tax year 2023/24, the annual exempt amount for trustees is £3,000 and for 2024/25 will be just £1,500.
Will I be impacted by the changes to Capital Gains Tax?
The changes to Capital Gains Tax will have a much wider impact than many people may anticipate.
Not only will thousands more individuals be brought within scope of CGT for the very first time, and so need to report their liabilities via a Self-Assessment tax return, but many existing taxpayers could also find themselves paying up to £2,604 more in additional tax.
Personal representatives of estates may also be impacted by the cuts, particularly where the disposal of property, investments and shares are concerned.
The issue, really, is timing, since the allowance can only be used by the personal representative in the tax year during which the death occurred, or the two years following. The annual exempt amount cannot be used where estate assets are disposed of outside of this window.
Worth noting is that assets held within a tax efficient wrapper, such as an ISA, are unaffected, and private residence relief on main homes will still apply.
Where capital gains tax is not payable, but where there are proceeds of at least £50,000, it is still necessary to report this to HMRC.
CGT: Key considerations and tax planning points
When it comes to accommodating the latest change, and preparing for the next, there are a few things you might like to consider.
- Utilise the annual exempt amount, and any losses
It is vitally important that you make use of your allowance since it cannot be carried forward. Whilst this year’s exempt amount is a lot less than in 2022/23, you should still consider the timing of any disposals to make use of the allowance before it’s cut by 50% again in April 2024, or to spread out the realisation of any gains.
In addition, losses can be offset against gains before deducting the annual allowance. If you do not use all your losses in a single tax year, they can be carried forward.
- Consider your use of any ‘tax-free wrappers’ such as ISAs
Each person is entitled to an ISA allowance of £20,000 per annum, meaning you could use any unused ISA allowance to shelter gains on investments from CGT.
- Reducing taxable income
By making charitable donations, or pensions contributions, you can reduce your taxable income and potentially your liability to CGT.
- Transferring assets
Transferral of assets to a spouse or civil partner are exempt from CGT but, as the annual exempt amount shrinks, the benefits of this method could be limited, and so careful consideration should be given to whether this is appropriate.
How can George Hay help?
Capital Gains Tax often involves a large tax charge and so undertaking careful tax planning can be essential if you are to minimise the tax that you pay.
Discussing your upcoming plans, or concerns about CGT, with a tax adviser or accountant could help you to significantly reduce your liabilities.
If you’d like to talk to one of our experts about CGT and the changes to the annual exempt amount, please contact us today.