How To Lower Your Capital Gains Tax Bill

Capital Gains Tax (CGT) is set to pose a bigger problem to investors, with record sums already being raised through the levy. On top of this, allowances were cut again on 6 April 2024.

CGT is paid on the profits earned on the sale of an asset, such as shares or property. And the government has been gradually increasing the tax collected in this way by reducing the tax-free allowance on gains.

The allowance on capital gains was reduced from £12,300 to £6,000 in April 2023, before being halved again to £3,000 in April 2024. This is likely to mean more investors will pay capital gains tax when selling assets. In fact, HMRC is already seeing far greater amounts of CGT being paid. Data from HMRC last year revealed that a record amount of CGT was paid in 2021/22 at £16.7 billion. That’s up by 15% on the previous year, while the number paying the tax jumped by 20% to 394,000. The latest government data shows £11.4 billion of CGT was paid in January 2024.

In addition, with the allowance now being cut further and the freezing of income tax thresholds, warnings have been raised that even more people will have to pay CGT, and at higher rates. More than a quarter of a million more individuals and trusts are expected to be paying capital gains tax for the first time thanks to the Government crackdown on gains.

Because the rate of tax hasn’t changed, but the point at which it kicks in has fallen, experts warn that those with relatively small investment gains are now going to be hit with the same tax increase as those with much larger gains. A very wealthy individual harvesting £1 million in capital gains a year will face the exact same additional tax of £1,860 as a result of the cut to the capital gains tax allowance, highlighting how the cut hits small shareholders every bit as much as the very wealthy in pounds and pence. But it will hurt a lot more in relation to the size of their gain.

There are ways to reduce your CGT bill though, especially if you are married or in a civil partnership. Splitting assets with your husband, wife or civil partner means you can effectively double your allowance and boost how much profit you can take tax-free when selling shares or an additional property.

Here’s what to consider:

Splitting your assets reduces your CGT bill

• HMRC provides some generous allowances to married couples or civil partners when it comes to owning assets jointly. If you jointly own an asset, such as a buy-to-let property, the allowances of both parties can be combined. This becomes more important with reducing allowances
• It effectively allows for a doubling of the profit threshold before CGT comes into play. In real terms, for the tax year 2024-25, this translates to a combined profit of £6,000 without being liable for CGT

Charitable and philanthropic giving

• Charitable or philanthropic giving is an alternative approach for a transfer of assets between spouses that is less widely used
• If a couple wishes to donate to charity, it is less tax-efficient for the gift to be made by a lower-rate taxpayer. Transferring the asset to the individual in the higher tax band before gifting, via Gift Aid, can be worth 20% on the higher rate or 25% in additional rate tax relief. This is because tax bands are extended by the gross charitable donation, thereby increasing the segment of income that’s taxed at the lower rates
• This is even more valuable for individuals with income between £100,000 and £125,140, as it will also restore some – or all – of their tax-free personal allowance of £12,570

Enterprise Investment Schemes

• You could also invest money into an Enterprise Investment Scheme (EIS), which can reduce or delay your CGT liability. Another way to limit your CGT bill is by not selling all your assets at once
• If you stagger the sale of shares over several tax years, then you can make the most of several years’ CGT exemption. For example, you could sell part of a share portfolio on 3 April and the rest on 6 April to take advantage of two years’ CGT exemption
• You can also offset any losses you’ve made on other assets. While no investor wants to make a loss, losses can be your friend for capital gains tax purposes

Bed and ISA

• Another option is to do a ‘Bed and ISA’. This is where you sell assets up to your CGT limit for the year and then buy them back within an ISA, which means you’ll protect any future gains from the taxman
• You’ll need to check how much ISA allowance you have remaining this tax year to make sure you don’t go over the £20,000 annual limit

If you would like to discuss ways to reduce your Capital Gains Tax liabilities, please contact your Finura financial planner here.

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Source: Techlink