In November, the current chancellor, Jeremy Hunt, announced that the Capital Gains Tax (CGT) annual exempt amount will be reduced to £6,000 in the next tax year starting on 6 April 2023, then further lowered to £3,000 in April 2024.
But why is the annual exempt amount dropping? And are there any ways to mitigate the effects of CGT on your finances? Continue reading to find out everything you need to know about the upcoming threshold cuts.
CGT is a charge on any profits you earn from the sale of assets
You will usually pay CGT on the profits you earn from selling assets, such as property that isn’t your main residence, investments held outside of an ISA, and some alternative forms of investments, such as whisky or art.
Before you pay this tax, though, you can take advantage of the “annual exempt amount”. This allows you to make gains up to a certain value before you’re liable to pay CGT.
In the 2022/23 tax year, this exemption stands at £12,300. This counts for each individual, meaning if you realised gains up to this threshold and your spouse or partner did the same with assets held in their name, it would essentially combine your exempt amounts and allow you to realise profits up to £24,600 before needing to pay CGT.
CGT rates in the 2022/23 tax year are:
- 10% (18% on property that isn’t your main residence) for basic-rate Income Taxpayers (on any part of the gain that doesn’t fall above the basic-rate band when added on top of income)
- 20% (28% on property that isn’t your main residence) for higher- and additional-rate Income Taxpayers (on any part of the gain that falls above the basic-rate band when added on top of income).
However, in the autumn statement last November, chancellor Jeremy Hunt announced that the CGT annual exempt amount will be reduced to £6,000 in April 2023, then again to £3,000 in April 2024.
This means that you will now have to pay CGT on gains over this threshold. For example, if you had taxable capital gains of £10,000 in the current tax year, you wouldn’t have to pay any CGT as it would be covered by your entire CGT exempt amount.
But from April 2023, only the first £6,000 of your gains would be covered, meaning the final £4,000 could be subject to tax. As you’re likely a higher- or additional-rate taxpayer, this would result in an £800 CGT bill, assuming the gains are not made from property that isn’t your main residence.
From April 2024 when the exemption falls to £3,000, this would make £7,000 of your gain taxable, resulting in a £1,400 CGT bill.
The government hopes the move will raise some extra capital and soften the blow the cost of living crisis is having on the economy. According to abrdn, the upcoming CGT exemption reductions will result in an additional 235,000 people needing to report their capital gains.
There are ways you can mitigate CGT liability
Even though the new CGT annual exempt amounts may seem low, there are methods you can employ to limit the effects of CGT on your wealth. Continue reading to find out how.
- Make the most of your CGT exemption before it drops
Perhaps the most obvious way to limit your CGT liability is to make the most of your annual exempt amount before it falls in the new tax year.
While you should ideally be making the most of your exemption every year, it’s essential to consider at the moment. If you’re expecting to make a significant capital gain through the sale of an asset in the coming weeks, it may be wise to do so before the new tax year begins on 6 April.
This way, you can maximise your gains by selling your asset under the old £12,300 limit before it drops to £6,000.
- Transfer assets to your spouse or civil partner
Another way to limit CGT is by transferring assets to your spouse or civil partner. This is because assets can be transferred from one partner to another to use each person’s total annual exempt amount.
This essentially doubles the total CGT exemption amount for couples, though it’s worth keeping in mind that the transfer must be a genuine gift.
- Invest in an ISA
Any gains made on investments held in an ISA are exempt from CGT. As such, making the most of your ISA allowance every year may be prudent, especially if you’re a higher- or additional-rate taxpayer.
In the 2022/23 tax year, you can typically invest up to £20,000 across all your ISAs. You can effectively double this allowance to £40,000 if your spouse or partner also maximises their ISA Allowance.
One helpful tactic that can be employed here is a “bed and ISA” strategy. This involves selling assets to crystalise capital gains, and then repurchasing those same assets immediately in an ISA. Doing so means any future gains from these assets will be free from CGT.
- Seek advice from a professional
When it comes to CGT mitigation and exempt amounts, it’s easy to get confused. As such, it may be prudent to seek financial advice from a professional.
At Rosebridge, we’ll ensure that you consistently maximise your tax reliefs, exemptions, and allowances. On top of this, we’ll discuss your options and advise you on the best course of action for your current financial circumstances.
To find out how we can help you, please email firstname.lastname@example.org or call 01204 300010.
This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.