Understanding the Changes
The recent cuts to the capital gains tax (CGT) exemption have ushered in a new era of financial planning, underscoring the importance of tax-efficient investment strategies. In the past, investors enjoyed a tax-free gains allowance of up to £12,300 annually. However, this exemption has been significantly reduced to £6,000 for the 2023/24 tax year, with a further decrease to £3,000 scheduled for 2024/25.
This change has a notable impact on both higher and additional-rate taxpayers, who are now subject to a CGT rate of 20% on gains exceeding this reduced threshold, and an increased rate of 28% for gains derived from residential property. Basic-rate taxpayers face CGT rates of 10% and 18% for these respective categories.
Given these alterations, optimising CGT liability is more crucial than ever to ensure that a greater portion of your earnings is invested in your future. While there are numerous strategies to minimise CGT, navigating its complexities can be daunting. Without professional guidance, there is a tangible risk of incurring unnecessary tax liabilities.
Strategies for Realising Gains
To navigate this new tax landscape, there are several strategies to consider:
- Maximise Your Annual CGT Exemption: Utilise the annual £6,000 CGT exemption available in 2023/24. It’s vital to leverage this exemption annually, as it doesn’t roll over, helping to mitigate future significant CGT liabilities.
- Leverage Losses Against Gains: Offset your taxable gains by accounting for any losses within the same tax year. Carry forward previously unutilised losses, ensuring they’re reported to HMRC within four years of the asset sale.
- Asset Transfer to Spouse/Civil Partner: Transfer assets to your spouse or civil partner to capitalise on each person’s CGT exemption, potentially doubling the benefit for couples.
- ISA Investments and ‘Bed and ISA’ Strategy: Invest in an ISA to shield gains from CGT, with a £20,000 allowance per individual in 2023/24. The ‘bed and ISA’ approach allows selling assets for a gain and rebuying them in an ISA, although potential costs and market risks should be considered.
- Pension Contributions to Reduce CGT: Contributing to a pension can raise the threshold for higher tax rates, potentially lowering CGT rates on gains if total income remains within the basic-rate band.
- Charitable Share Donations: Donating land, property, or qualifying shares to charity can offer both income tax and CGT relief.
- Enterprise Investment Scheme (EIS) Investments: EIS investments are exempt from CGT after three years. Capital gains can be deferred by investing in EIS-qualifying companies, though this involves higher risk.
- Utilise Gift Hold Over Relief: This relief applies to certain business asset gifts, deferring CGT to the recipient upon their future sale. Eligibility conditions apply.
- CGT Exemption on Certain Chattels: Gains on items like some antiques or ‘wasting assets’ (with a lifespan under 50 years) can be exempt from CGT. The exemption also often applies to non-wasting chattels sold for £6,000 or less.
- Seek Expert Advice: Given the complexity of CGT, professional advice is essential to ensure you’re fully utilising available reliefs and allowances for your specific situation. Investment advice should always be taken as selling an asset to realise a gain or loss cannot always make sense if it is though that asset might increase in value if held for longer.
Conclusion: Proactive Planning is Key
The reduction in the CGT annual allowance necessitates proactive financial planning. It’s important to review and possibly realign your asset portfolio in light of these changes. Beavis Morgan’s personal tax division is dedicated to assisting our clients in navigating these complexities, ensuring they make the most informed decisions for their financial future. Contact Neal Groves, Tax Partner, Beavis Morgan.