Capital Gains Tax (CGT) is a wide ranging and complex tax that is levied following the disposal of certain assets based on the increase in value over the tenure in which the asset has been held. Typical assets impacted by CGT are investments (unless held in a tax-efficient environment such as an ISA or pension) and properties that are not your primary residence.
The current tax rates depend on your overall taxable income and the assets you have disposed of. For higher rate taxpayers, CGT is 24% on residential property and 20% on stocks and shares. For basic rate taxpayers, if their total level of income is within the basic rate income tax band (£12,571 to £50,270) then CGT rates are lower at 10% on stocks and shares and 18% on property, up to the basic tax rate level. After this they are taxed at the same rates as higher rate taxpayers.
Don't let the tax tail wag the investment dog.
There are various reliefs and exemptions available to mitigate a CGT liability, most notably the Annual Exempt Amount, the CGT allowance which every individual is annually entitled to and currently stands at £3,000 for 2024/25 (having reduced from £6,000 in 2023/24).
How could CGT rules change under a new government?
CGT allowances and rates have been moved by numerous Chancellors over the years and with a new government there is the risk that the rules could change again. It should however be noted that Rachel Reeves, Shadow Chancellor, recently said she has “no plans to equalise capital gains tax rates with income tax.” We will continue to monitor this as we acknowledge it as one of the possible changes a new government could implement.
Actions to consider
Ensure that you use the annual CGT allowance. Similarly, maximise use of tax efficient ISA wrappers: all investments in an ISA are exempt from CGT.
If possible, utilise both spouse allowances where relevant; HMRC regards disposing of an asset as selling it, giving it away as a gift, swapping it for something else or receiving compensation for it (such as an insurance payout). However, CGT may not have to be paid when gifting between spouses or civil partners. Gifting to a spouse can transfer the book cost and gain and it can then be crystallised in their name when sold.
Review losses: if you make a loss, the amount is deducted from gains made in the same tax year. Selling an investment at a loss could offset a gain that you may want to take elsewhere. Losses can also be carried forward from previous tax years and used to offset net gains taken today. Previous losses do need to be reported to HMRC and this can be up to 4 years from the tax year when the loss was taken.
While it might be tempting to avoid or delay paying CGT, it can be wise to keep a wide perspective: CGT arises because profits have been made on investments. Investors should therefore consider this a ‘winner’s tax.’ "Don't let the tax tail wag the investment dog" is a phrase often used to focus investors on the bigger picture and not let tax control the investment decision process. Review your portfolio and don’t hold on to an asset just because it would lead to a tax liability if you were to sell it. This could be restricting your capital from investing in better opportunities. Review assets with big gains and ensure these are performing or in sectors you still want to invest in. If an asset with a large gain is underperforming, it may be best to accept the tax on the gain and use the proceeds to invest in better performing sectors and regions.
It is also worth bearing in mind that CGT tax rates are currently lower than income tax rates. For higher rate taxpayers, CGT is 20% on stocks and shares, whereas the income tax rate for these taxpayers is 40%. There is a risk that CGT rates may increase under future governments and therefore investors may want to crystallise gains when rates are at current relatively low levels.
Finally, it is important to note that on death, asset values are uplifted to probate values and therefore capital gains/book costs are effectively reset with no CGT to pay. This should be considered when undertaking CGT and estate planning.
We often recommend that specialist advice should be sought if you are unsure if a disposal may give rise to a CGT liability. Please speak to your Investment Manager for further information.
The information provided in this article is of a general nature and is not a substitute for specific advice with regard to your own circumstances. You are recommended to obtain specific advice from a qualified professional before you take any action or refrain from action.
