In the 2022/2023 tax year, Capital Gains Tax (CGT) receipts reached a record £18 billion, an increase of around £2.8 billion compared with the previous year. Overall, the number of people paying the tax has more than doubled in 10 years and this number is only likely to rise as the tax-free allowances have become far less generous.
And it is not just paid by the super-wealthy. Whilst around 45 per cent of the total CGT paid is on gains of £5 million or more, 214,000 people paid it on gains of up to £25,000.
How does Capital Gains Tax work?
CGT is paid on profits when you sell assets, such as shares, second homes, buy-to-let properties and personal possessions. The profit is the amount it sells for, less what you paid for it or what it was worth when acquired.
Depending on the asset, there are tax reliefs available, and each person has a CGT allowance. This used to be set at £12,300 each year, but was cut to £6,000 in April 2023. It will be cut further to £3,000 in April 2024. As a result, the amount of people paying CGT is likely to increase, with the government estimating this will raise an extra £440 million a year from 2025.
The current CGT rates payable are 10% for basic-rate taxpayers and 20% for those paying the higher-rate and above. But on residential property (other than your own home) the rates are 18% and 28% respectively. Your rate of CGT will depend on your other taxable income.
What actions can you take?
There are a several things you can do to mitigate CGT. There are important tax-free allowances and exemptions every year that can help to reduce your tax liability, which your Origen adviser would be happy to discuss with you.
Individual Savings Accounts (ISAs) and pensions can provide valuable protection against these taxes – gains inside both are free of CGT, while money held inside a pension is unlikely to fall within your estate for Inheritance Tax purposes under current tax rules.
Other ways to reduce CGT
As we look to the future and the prospect of more people caught by the CGT rules, it becomes crucial that people use all the tools available to them to prevent paying unnecessary tax. Some additional questions to consider are:
- Can you use your CGT allowance more efficiently by selling assets over separate tax years?
- Can you transfer assets between you and a partner so that both annual CGT allowances are used as part of a disposal?
- Is it worth considering selling a second property before your CGT allowance reduces again in April 2024?
- Do you have any other savings or share investments that you can put into ISAs or pensions to protect them from CGT?
- Are you willing to invest some of your cash investments over the medium to long term of five years or more in search of higher potential returns?
Helping you to maximise your tax allowances
Whilst CGT can significantly reduce the value of your investment returns and overall wealth, there are many ways to help prevent paying unnecessary tax.
If you have any questions about how CGT or any other tax changes may affect your financial plans, let’s talk it through together and make sure you feel comfortable that you’re in control of your financial plans.
Please contact your Origen adviser, or call our Client Services Team on 0344 209 3925* or email clientservices@origenfs.co.uk to arrange a call at a time to suit you.
* Calls are charged at your phone company’s basic rate. All calls are recorded for business purposes.
Please note that tax treatment varies according to individual circumstances as well as current legislation, which is subject to change. The value of investments and the income derived from them may fall and you may get back less than you invested. Past performance is not a guide to future performance. No investment is suitable in all cases and if you have any doubts as to an investment’s suitability then you should contact us.
CA10641Â Exp: 10/24.
