You’re liable for CGT when you ‘dispose’ of certain assets at a profit. You don’t have to pay CGT on assets disposed of within pension, ISA or insurance bond policies, which is why these can be very valuable tax shelters. Disposals of UK government gilts, cars and personal possessions worth less than £6,000 are exempt from CGT, and you normally don’t have to pay CGT when selling your main home, provided you’ve lived there more or less all the time you’ve owned it.
However, assets that are subject to CGT on disposal include second homes, unwrapped investment funds and shares, and valuable personal possessions (worth more than £6,000) such as jewellery or artwork. Disposing of an asset includes selling it, swapping it for another asset or giving it away to somebody else (other than your spouse or civil partner).
Currently, the first £12,300 of net capital gains per person per tax year are tax-free. This “annual exemption” is “use it or lose it”, it cannot be carried forward. After the first £12,300, the rate of CGT depends on the level of income tax you pay, as the taxable gains get added to your income. Taxable gains that fall within your basic rate band are taxed at 10%, whereas taxable gains that fall into the higher rate and additional rate bands are taxed at 20%, in both cases lower than income tax rates. But if you’re selling residential property, CGT rates are higher, at 18% and 28% respectively.
It can be challenging to regularly use your annual exemption if you own multiple properties, as you can rarely sell off part of a property – most buyers will want all of the property, not a share of the ownership or the rights to just the downstairs loo. But one of the key advantages of an investment portfolio is that you can regularly switch all or part of the portfolio into other (often quite similar) assets to realise gains within the tax-free exemption.
With careful planning, over the years this kind of straight-forward tax planning every year can make an enormous difference to your eventual tax bill. This is illustrated by the example below, based on an initial investment of £250,000 that grows at 5% per year for 10 years to £407,200 (we’ve assumed the annual exemption and CGT rates remain the same):
If you are married or in a civil partnership, consider also arranging for one spouse to gift assets to the other to sell. Assets can be passed between spouses without any CGT liabilities, so unrealised gains on assets held by one spouse can be realised by the other. This can allow you to both use your annual exemptions, and realise tax-free capital gains of up to £24,600 this tax year.
If you’ve already made gains of more than your annual exemption, then there might still be steps you can take before the end of the tax year. If you have assets showing unrealised capital losses, you might be able to dispose of these, offset these against taxable gains, and avoid a tax bill next January. If you’ve made net capital losses in previous tax years, and have made sure these are registered with HMRC, you can offset these against taxable gains this tax year or in future tax years. And if you’re a basic rate income taxpayer, it might be worth crystallising some gains that are taxed at just 10% now (rather than paying 20% later), or considering whether pension contributions (if appropriate) might reduce the rate of CGT you have to pay from 20% to 10%, as well as bringing other benefits.
Finally, bearing in mind the fundraising of many charities has been interrupted by COVID-19, remember that you can gift assets with unrealised gains to charity without paying CGT. There are also significant income tax and inheritance tax benefits to charitable gifts.
The government has already announced in the recent Budget that the annual CGT exemption will remain frozen at £12,300 until April 2026, meaning the value of the exemption is likely to be eroded by inflation over time.
But it’s possible that the government may make further changes to CGT in the future. The Office of Tax Simplification has suggested that the government should consider “more closely aligning” the rates of CGT and income tax, which would mean raising CGT rates (if the government decides to act). Other recommendations included reducing the number of different CGT rates, reducing the level of the annual exemption, levying CGT on death, especially if no inheritance tax is payable, and also replacing Entrepreneur’s Relief. We’ll have to wait and see if the government acts on these.
We might hear more about any changes at the Autumn Budget later in the year. If there are any changes, the steps you take this tax year – all sensible measures even if there are no changes – could prove all the more valuable.
The tax year ends on 5 April, but due to Easter, the last working day of this tax year is 1 April, so if there’s something you could do now to reduce your future CGT liabilities, don’t delay!
If you’d like more information about CGT or advice on other areas you may wish to consider before the end of the tax year, please get in touch with your usual adviser.
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