- Latest figures show £11.4bn of Capital Gains Tax was paid in January 2024
- From April the tax-free allowance for CGT will be cut again, to £3,000
- Using the CGT allowance every year for the next 10 years and moving that money into an ISA could save up to £15,550 in tax
- Ways to cut your CGT bill
Laura Suter, director of personal finance at AJ Bell, comments:
“More than a quarter of a million more individuals and trusts will be paying capital gains tax for the first time thanks to the government crackdown on gains*. From April the tax-free allowance for CGT will be less than a quarter of what it was just a year ago, dragging more people into paying tax, filing a tax return and seeing tax eat into their returns.
“The capital gains tax-free allowance was cut from £12,300 to £6,000 for the current tax year and will be chopped in half again from April, to just £3,000. It means that from April this year a higher-rate taxpayer will pay up to £1,860 more tax on their investments compared to a year ago, assuming they were to realise gains up to the previous £12,300 limit, while a basic-rate taxpayer will be hit with up to £930 more on their tax bill.
“Because the rate of tax hasn’t changed but the point at which it kicks in has fallen, those with relatively small investment gains are 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.
“But there’s still time before the tax year end to protect your investments from the taxman. Some clever financial planning now can help you keep more of your money not just next year, but in future years too.”
Use up your allowances
“If you’re sitting on large capital gains outside an ISA or pension you can use up your tax-free allowance of £6,000 this year before it’s slashed to £3,000. If you sell investments to realise gains up to this level you won’t pay any tax on the money. You just need to check what gains you’ve already realised this tax year, across all your investments, and make sure you don’t exceed the tax-free limit.”
Fill your ISA
“If you have investments outside a tax wrapper the savviest move is to transfer that money into an ISA, or into a pension if you can afford to tuck it away for longer. 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.
“For those sitting on large capital gains you can sell assets to realise a gain up to your remaining tax-free allowance and then buy it back within your ISA, which means you’ll make use of the tax-free allowance and protect any future gains from the taxman. You can use your platform’s Bed and ISA service, just make sure you check the deadline, which is usually a few working days before the tax year end.
“The cumulative effect of this really adds up. Someone who realised capital gains up to the allowance each year* for the next 10 years and moved that money into an ISA could save £15,550 in tax if they were a higher rate taxpayer, compared to leaving the gains to build up in a non-ISA account and realising them all in one year. For a basic-rate taxpayer the saving would be £7,775.**”
Transfer money to your spouse
“Any investments transferred to your spouse or civil partner are exempt from capital gains tax. This means that if your spouse hasn’t used up their tax-free allowance this year and has some ISA allowance remaining you can make use of those tax breaks. You just need to make sure you keep a note of the original cost of the asset, as that’s what will be used when your partner comes to sell it.
“If your spouse is in the basic rate income tax bracket but you’re a higher or additional rate taxpayers there’s a double benefit, as they will pay capital gains tax at a lower rate. That means even if they have used up their tax-free CGT allowance, there could still be a benefit to transferring the assets to them. For example, if you have a £5,000 gain and have already used your allowance a basic-rate taxpayer would pay £500 in CGT while a higher-rate payer would pay £1,000 – meaning a potential saving of £500.”
Use your losses
“While no investor wants to make a loss, losses can be your friend for capital gains tax purposes. Losses made in the current tax year can be offset against any gains before you deduct the tax-free allowance. If you don’t use them this year you can carry forward any losses for future tax years, to offset against any future gains. Just make sure you register the losses with HMRC within four years after the end of the tax year in which you made the sale in question.”
Use your pension contributions to drop your income tax band
“One particularly clever trick is to use your pension contributions to reduce your income tax band. When you contribute to your SIPP, the gross value of the contribution has the effect of extending your basic rate tax band. This means that the rate of capital gains tax you pay could be lower if it means you are no longer a higher-rate taxpayer. This is a particularly handy trick if you’ve only just tipped over into the next tax band, meaning a small pension contribution would bring you under the threshold. If you have used your full pension allowance this year or cannot make a pension contribution, you can also lower your taxable income by donating to charity. If you’re eligible, you can then also claim gift aid on the donation.”
How much the CGT cut is costing:
*The changes to CGT mean that 260,000 more individuals and trusts will be paying CGT for the first time by 2024/25, according to HMRC figures.
**Assumes allowances and rates remain at 2024/25 levels for the next 10 years and that assets grow by 5% a year. Assumes the total transfer into the ISA is £20,000 in the first year and £10,000 a year thereafter. Doesn’t include trading costs.
