Taking the time to assess any challenges or obstacles you might face in life, and considering any options open to you, is likely to lead to positive outcomes.
A challenge millions of Brits face in the springtime is the approaching end of the tax year and the possibility of a hefty tax bill.
Capital Gains Tax (CGT), and any liabilities stemming from it, can present difficulties at the best of times, but are especially challenging this year. Allowances are being altered going into the 2023/24 tax year and this means you may face larger CGT bills in the future.
Read on to discover how CGT allowances are changing in the 2023/24 tax year and six proven ways you can reduce your CGT liabilities in 2023.
The annual CGT exempt amount is due to be reduced from April 2023
CGT is payable on any profits you make from the sale or disposal of assets within each tax year.
Investments and assets that you generally could expect to pay CGT on include:
- Shares and funds (unless you hold them in an ISA or pension)
- Second properties or buy-to-let
- The sales of a business
- Prized possessions sold for more than £6,000.
The annual exempt amount allows you to earn a certain amount of profit before your gains become liable for CGT.
However, recent government tax changes have included alterations to the exempt amount starting with a reduction in the annual exempt amount from £12,300 to £6,000 from April 2023. The amount will be halved again from April 2024, reducing to £3,000 and being frozen thereafter.
The planned reductions will affect trusts as well as individuals.
The new tax year will see CGT rates above the threshold remain the same
It is important to remember that CGT rates differ from Income Tax rates. They are separated into two categories — basic- and higher-/additional-rate taxpayers.
Above the threshold, the basic rate remains at 18% on residential property gains and 10% on all other assets. Meanwhile, for those in the higher- and additional-rate brackets, they remain at 28% and 20% respectively.
Remember: It is not possible to offset CGT using any unused personal allowances, which is important to be aware of — especially with the lowered annual exempt amount.
6 proven ways to help you reduce your CGT liability
1. Maximise the use of your allowances
It is vital that you consider ways to maximise the use of the full value of your CGT annual exempt amount. The allowance can’t be carried forward to a subsequent year, and in light of the reducing amount, using every bit of your exemption can help mitigate your bill.
2. Make use of your losses to offset profits
CGT is charged on the profits you make on assets and investments. So, in reducing your gains through making use of your eligible losses, you can lower your CGT liability.
Remember: gains and losses from the same tax year must be offset against each other — which can reduce the value of any profits, and consequently any CGT due.
It is also possible to bring forward any unused losses from previous tax years, provided you report them to HMRC within four years from the end of the tax year in which your asset was sold.
3. Take advantage of spousal benefits and transfer assets
There are plenty of benefits available to individuals in a married or civil partnership, and it could be worth discussing with a financial planner the full spectrum of ways this could benefit your plans.
In terms of CGT, you could take full advantage of any remaining value on your partner’s unused exemption by transferring over any CGT-liable assets into their name.
This essentially allows couples to effectively double their CGT exemption through sharing their allowances.
4. Invest in a Stocks and Shares ISA
Stocks and Shares ISAs offer several tax benefits including:
- An annual allowance of £20,000 for the 2022/23 tax year, or effectively £40,000 for married couples or civil partners
- Any gains made on investments held within an ISA are exempt from CGT.
So, this method of investing can be especially desirable for taxpayers on higher-/additional-rate Income Tax, who can still invest while being protected from their 20% CGT rates.
5. Reduce your taxable income levels
As your CGT rate is dependent on your Income Tax band, taking steps to move into a lower Income Tax bracket could subsequently reduce your CGT liabilities.
One way to do this is by maximising the use of your workplace pension contributions.
Pension schemes are powerful tax-efficient methods of saving with the potential for substantial tax relief dependent on the level of your Income Tax.
You can receive relief up until the Annual Allowance is met, which currently stands at £40,000 (or 100% if earnings are below this threshold) for the 2022/23 tax year.
So, increasing your pension contributions could have the dual benefit of reducing your short-term tax liabilities and increasing the value of your retirement savings in the long term.
6. Invest in an Enterprise Investment Scheme
An Enterprise Investment Scheme (EIS) is a high risk, government-supported investing programme that aims to support small-scale, fledgling businesses in the UK find external investment.
Investors are incentivized by the government through benefits such as:
- Any gains made on an EIS investment are free of CGT (as long as the investment is held for three or more years)
- EIS investments qualify for up to 30% Income Tax relief (2022/23 tax year).
The downside of investing in an EIS is that these types of schemes are exposed to an increased risk of failure and potential losses than traditional investments, as the companies that make up the schemes have a greater chance of collapsing than established businesses.
Remember: only consider investing in an EIS if it aligns with your personal tolerance for risk.
Get in touch
If you have any concerns about your tax liabilities and how they may affect your long-term plans, you should reach out for advice by email at email@example.com or by calling 0117 9303510.
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.
A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.
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.
Enterprise Initiative Schemes (EIS) and Venture Capital Trusts (VCT) are higher-risk investments. They are typically suitable for UK-resident taxpayers who are able to tolerate increased levels of risk and are looking to invest for five years or more. Historical or current yields should not be considered a reliable indicator of future returns as they cannot be guaranteed.
Share values and income generated by the investments could go down as well as up, and you may get back less than you originally invested. These investments are highly illiquid, which means investors could find it difficult to, or be unable to, realise their shares at a value that’s close to the value of the underlying assets.
Tax levels and reliefs could change and the availability of tax reliefs will depend on individual circumstances.