Over the last two years, the tax-free allowance for capital gains tax has been cut by over three-quarters. For this tax year, that started on the 6th April 2024, the Annual Exempt Amount has been reduced to £3,000 (£1,500 for trustees).

These reductions mean that more and more people are likely to be affected by capital gains tax.

What is Capital Gains Tax?

Capital gains tax is essentially a tax you pay when you make money from selling something that has increased in value. 

This could be anything from a house to shares or even a piece of art. For example, if you bought shares for £500 and sold them later for £1,000, the £500 profit could be subject to capital gains tax.

How much Capital Gains Tax would be due?

How much tax you pay depends on a few things:

1. It depends on what you are selling and how much profit you have made. 
2. It depends on how your total income in the year. If you earn more, you might pay a higher rate of tax on your gains. 
3. The total amount of gain you make in a tax year is reduced by the Annual Exempt Amount.

Not all gains are taxed though, so care is needed! For instance, if you sell your main home or certain types of investments like ISAs, you might not have to pay any tax on the profit.

Are there ways to reduce Capital Gains Tax?

There are a few things you could think about doing to help reduce the amount of capital gains tax you might need to pay.

• As mentioned above, the rate of tax you pay depends on how much money you make overall. If you can reduce the income on which you’re taxed, this may reduce the capital gains tax rate. One way to do this is by making pension contributions, given these reduce your income for tax purposes.

• Where an asset can be separated into different parts – a portfolio of shares would be a good example – you could split the sale between two tax years. For example, you could sell some shares on 5^th April, and then more on 6^th April. This could give you two years’ worth of allowances against which to apply your gain. 

• If you have no plans to sell assets during a tax year, you could sell some of them to use up your Annual Exempt Amount, and then immediately buy them back within an ISA. Any future gains you make on those assets will then be tax-free.

• The Annual Exempt Amount can be combined for jointly owned assets, so you may be able to split your assets with your spouse or civil partner. You can also transfer assets between you without having to pay capital gains tax. If your spouse or civil partner pays income tax at a lower rate than you do, or perhaps has made a loss on selling other assets, this might be a way of reducing the capital gains tax you pay as a couple.

The reductions in the Annual Exempt Amount mean that more of us could end up having to pay capital gains tax. If you’re unsure, please get in touch to ensure you’re making best use of the allowances, and making the best decisions around the structure of any sales you may be planning. 

Important note: this post is intended purely as a thought starter. There is no substitute for a detailed conversation with an experienced advisor that relates to your own personal situation. Please check with us or your own accountant that the content above remains accurate and applies favourably to you before making any decisions.