Navigating Capital Gains Tax (CGT) can be complex, and without a clear strategy, you may end up paying more tax than necessary. With ongoing changes to allowances and thresholds, understanding how CGT works and utilising available reliefs can help reduce your liability while keeping more of your wealth intact. Careful planning and informed financial decisions can make a significant difference in how much tax you owe when disposing of assets such as property, shares, or valuable collectibles. Without proper tax planning, unexpected CGT bills could potentially reduce your investment returns, limiting your long-term financial growth.
Make the Most of Your Annual CGT Allowance
For the 2024/25 tax year, the CGT exemption allows tax-free gains of up to £3,000 per person. Since this allowance cannot be carried forward, it’s important to use it each year to avoid higher tax bills in the future. With recent reductions to the CGT allowance, optimising the use of this exemption is now more important than ever. This effective yet simple strategy can be easily overlooked by investors and not taken advantage of and result in unnecessary tax burden which could be avoided with proactive planning.
Offset Gains with Losses
If you have capital losses, they can be used to reduce taxable gains. Losses in the same tax year can offset gains immediately, while unused losses from previous years can be carried forward—provided they were reported to HMRC (HM Revenue & Customs) within four years. This strategy can be especially useful in years when you expect to realise significant capital gains. By ensuring that losses are recorded and carried forward correctly, you can minimise tax liabilities over time and create a more tax-efficient investment approach.
Spousal Transfers to Maximise Allowances
Transfers between spouses or civil partners are exempt from CGT, allowing couples to split ownership of assets and effectively double their CGT allowance. By strategically transferring assets before disposal, both partners can claim their individual CGT exemption, reducing taxable gains. However, transfers must be genuine gifts and not conditional transactions. For married couples and civil partners, this can be a straightforward way to reduce tax. This strategy can be particularly effective when planning asset disposals over multiple tax years.
Use ISA Allowances for Tax-Free Growth
Investments held within an ISA (Individual Savings Accounts) are exempt from CGT, making them a valuable tool for tax-efficient investing. For the 2024/25 tax year, individuals can invest up to £20,000 per person (£40,000 for couples), ensuring tax free gains. A ‘bed and ISA’ strategy, which involves selling investments from a General Investment Account (GIA) and repurchasing them within an ISA, can help reduce future Capital Gains Tax (CGT) exposure. However, it’s important to consider transaction costs, potential stamp duty, and the risk of being out of the market during the transition period.
Lower CGT with Pension Contribution
Pension contributions extend your basic rate tax band, which can lower the CGT rate on gains. This means that capital gains that would typically be taxed at 24% may instead be taxed at 18% if your taxable income remains within the basic rate band. For example, contributing £10,000 into a pension could increase the higher-rate tax threshold, reducing CGT exposure on any capital gains within that range.
Reduce Tax Through Charitable Giving
Donating land, shares, or property to a registered charity provides CGT exemption and Income Tax relief, making it a tax-efficient way to support good causes while lowering your liability. By gifting assets to charity rather than selling them, you can avoid CGT altogether while also benefiting from potential Income Tax deductions. This is a particularly useful strategy for individuals looking to integrate philanthropy into their financial planning while optimising tax efficiency.
Enterprise Investment Schemes (EIS) for CGT Relief
Investing in an Enterprise Investment Scheme (EIS) allows gains to be exempt from CGT if the investment is held for at least three years. Additionally, you can defer an existing capital gain by reinvesting it into an EIS within the qualifying timeframes. This deferral means that CGT on previous gains does not need to be paid until the EIS investment is eventually sold. However, EIS investments carry higher risks, and liquidity can be a challenge, so seeking professional advice is strongly recommended before proceeding with this strategy.
Using Gift Hold Over Relief
If you give away business assets or sell them at a reduced value for the benefit of the buyer, you may qualify for Gift Hold Over Relief. This defers the CGT liability, transferring it to the recipient, who will only pay CGT when they eventually sell the asset. This strategy is particularly beneficial for business owners passing assets to the next generation. However, strict eligibility rules apply, and it’s essential to seek professional guidance to ensure compliance. By making use of this relief, families can help secure business continuity while reducing immediate tax liability.
Exemptions for Chattels and Antiques
Certain personal possessions may qualify for CGT exemptions, particularly antiques, collectibles, and chattels. Non-productive assets such as vintage cars, antique clocks, and pleasure boats are often exempt, provided they were not eligible for business-use capital allowances. For non-wasting chattels, such as paintings or jewellery, gains may also be exempt if the sale proceeds are under £6,000. Understanding these exemptions can help individuals manage capital gains more effectively, especially when dealing with high-value personal assets. Proper valuation and tax advice can ensure that assets are structured in the most tax-efficient way possible.
To discuss any of the issues raised in this article, please contact us. Further information can also be found at gov.uk.
Personal circumstances differ and not all of this information is applicable to every client and/or their business, this information is general in nature and should not be relied upon without seeking specific professional financial advice.
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Thresholds, percentage rates and tax legislation may change in subsequent finance acts. Levels and bases of, and reliefs from, taxation are subject to change and their value depends on the individual circumstances of the investor. The value of your investments can go down as well as up and you may get back less than you invested. Past performance is not a reliable indicator of future results.
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