Will you need to start paying capital gains tax in the future?

Capital gains tax is paid on the profits earned from the sale of an asset, such as shares (not held in an ISA), property or anything you sell that is valued at £6,000 or more. The capital gains tax rates are different from other taxes you may already pay, such as income tax, but the potential increase in the capital gains tax (CGT) rates and the already planned reduction in the tax-free threshold for CGT over the next two years, from £12,300 to £3,00 by tax year 2024/25, means that an estimated quarter of a million more people will be liable for CGT, according to government stats. Will you be one of those who needs to start paying capital gains tax in the future?

How is Capital Gains Tax (CGT) rules changing?

Your CGT bill depends on your income tax band.

Basic rate taxpayers will owe 18% on any gains when selling an additional residential property or 10% on other assets.

If you pay the higher or additional rate of income tax and you’re selling residential property, you’ll pay 28% CGT. This drops to 20% on other investments.

There is an exemption for a certain amount of profit before the tax is owed.

This was £12,300 up to the current tax year, is now £6,000 and will halve to £3,000 from 2024/2025.

Married or in a civil partnership? You can enjoy generous tax breaks

If you own an asset such, as a buy-to-let property, jointly, the tax-free allowances can be combined or doubled in effect.  For example, if you sold a jointly owned property in 2023/24 tax year, your annual tax free allowances combined are £12,000. You therefore do not pay any capital gains tax up to this profit threshold.

Be careful: If a married couple get divorced, 50% of assets belong to the other party.

Assets can also be freely transferred between spouses or civil partners without incurring a capital gains tax event or a perceived ‘sale’ of an asset by HMRC. This is useful for couples where one partner is in a lower tax band, or earning less.

This is also a useful tool if one partner has losses already from a sale of an asset, that can be offset against gains (above the tax free threshold) made on another sale of an asset.

Be careful: The transfer of an asset to a spouse has to be in a tax year where the couple have been living together at some point. but not necessarily at the time of the transfer.

ALTERNATIVE WAYS TO REDUCE YOUR CGT BILL 

A couple of tried-and-true methods for curbing your CGT include contributions to your pension and charitable donations. These actions effectively diminish your overall income tax band within a given tax year.

Consider delving into an Enterprise Investment Scheme (EIS) as another avenue for mitigating or deferring your CGT liability.

A strategic approach to limit your CGT entails refraining from offloading all your assets simultaneously. By staggering the sale of assets—such as shares—across multiple tax years, you leverage several years' worth of CGT exemption.

For instance, selling a portion of your share portfolio on 3 April and the remaining portion on 6 April allows you to capitalize on two years' CGT exemption.

Moreover, offsetting any losses incurred on other assets can be beneficial for CGT purposes. While experiencing losses may not be ideal, they can serve as a valuable tool for mitigating capital gains tax.

Losses accrued in the present tax year can offset gains made within the same year, before deducting your annual tax-free allowance. Unused losses can also be carried forward to subsequent tax years, serving as a shield against future gains. It's crucial to register these losses with HMRC within four years following the end of the tax year in which the sale occurred.