Yahoo Finance Capital gains tax allowance and six tips to reduce your bill
Following a series of cuts to capital gains allowance in recent years, the tax could be set to become even more expensive if it is targeted by Labour in the upcoming Budget.
The Government has not ruled out raising capital gains, and since it is a tax on wealth, higher rates would mean Labour keeps its promise not to raise taxes for “working people”. One option could be increasing tax rates to be equal with income tax – for higher-rate taxpayers realising gains on shares or assets that aren’t property, this could see their tax rates double.
This comes after a series of cuts to the tax-free allowance, which is currently £3,000 in 2024-25, down from £6,000 in 2023-24. In 2022-23 it was £12,300.
Luckily there are ways you can avoid it. Here, Telegraph Money explains your options.
What is the capital gains tax allowance?
Any share gains over the allowance (currently £3,000) are taxed at 10pc, for basic-rate payers, and 18pc for higher-rate payers.
Rates of 18pc (for basic-rate) and 24pc (for higher-rate payers) apply to residential property sales. The rate for higher-rate taxpayers was 28pc before April 2024.
The table below shows the CGT rates for 2023-24 (you’ll need these if you’re submitting a tax return this year):
This table shows the latest rates for 2024-25:
1. Max out your allowance
One of the easiest solutions is to ensure the full tax-free allowance is used each year, because it cannot be applied retrospectively, carried forward or transferred to a spouse.
Nimesh Shah, of accountants Blick Rothenberg, advised a tactic known as “bed and breakfasting” to help make the most of the full annual exemption. This involves selling shares either side of a new tax year to crystallise a capital gain.
He added: “The tax rules to calculate capital gains mean you cannot repurchase the same shares within 30 days, but you could use your spouse or an Isa to purchase the shares and legitimately circumvent the 30-day rule.”
If you’re selling an asset that can be sold off in chunks, you could also lower or avoid paying CGT by selling gains in instalments – across multiple tax years. For instance, you could sell some of your investment before April 5 and then another lot in the new tax year.
If you’re concerned about potential tax rate increases from Labour, you might want to realise more gains while you know how much you’ll be charged. Sarah Coles, head of personal finance at Hargreaves Lansdown, said: “This isn’t guaranteed to save tax – it just means you can choose to realise the gains when you have certainty over what they will cost.
“It’s vital not to rush into any decisions, or allow the tax to force you into decisions you wouldn’t otherwise take.”
2. Make use of tax-free wrappers
If you hold investments outside of a tax-free wrapper, the best thing to do is transfer them into an Isa or – assuming you can part with the money for longer – into a pension.
The annual Isa allowance is £20,000, while most taxpayers can contribute up to £60,000 a year into their pension without paying tax.
If you are already sitting on large capital gains, you can sell the assets to realise a gain up to your remaining CGT allowance and then repurchase the investments within your Isa or pension to protect any future gains from the tax man.
These processes are called “bed and Isa” or “bed and pension”.
3. Use Enterprise Investment Schemes
Asset gains can be reinvested into Enterprise Investment Schemes (EIS) – a type of high-risk venture capital investment – and deferred over the duration of the investment.
EIS is a government initiative aimed at helping small businesses raise cash, whereby investors are rewarded with CGT relief.
Chris Etherington, of accountancy firm RSM, says opting for EIS could be a shrewd move.
He said: “You can essentially defer your gains, with the mindset ‘I’m going to kick that tax problem down the line until I actually sell my EIS investment’. So it’s a deferral rather than a tax saving. But if the investment is a favourable one and the company becomes a big name, it’s probably one of the most tax efficient moves you can make.”
Mr Shah advised that investors should be cautious.
“It is possible to defer capital gains into the EIS investment, but this decision should be carefully considered as the capital gains will be revived when the investment is sold and taxed at the rate at the time.
“So this could be higher than the current CGT rate. Also capital gains on the sale of the EIS investment will be exempt from CGT only if certain qualifying conditions are met, including broadly holding the shares for three years.”
4. Transfer assets to husband, wife or civil partner
In the vast majority of cases, CGT is not payable on gifts to a husband, wife or civil partner, unless you separated and did not live together at all in the tax year.
However, your partner may be liable for tax if they later sell the asset and the gain will be calculated on the difference in value from when you first owned it and when they sold it.
Once the asset is transferred to your partner they are the legal owner, so you need to be confident in the strength of the relationship.
Mr Etherington said: “It makes sense to split things as efficiently as possible between spouses and partners, though you do need to be mindful of things like divorce.
“What HMRC doesn’t like is when it’s not a genuine gift. For example, if you transferred an asset to a spouse, sold it, and then all the money came back into your bank account. That’s when they would take issue.”
Mr Etherington explained that couples can also make use of the “bed and spouse” method. “If one spouse sells and then the other spouse will buy it. This is something which doesn’t seem to be challenged by HMRC.”
Spouses can do this transferring of shares trick on the same day as long as it is done through the stock market.
5. Claim for losses
No-one wants to lose money on an asset, but if you do, you can leverage those losses (including on assets such as cryptocurrency) to offset capital gains you’ve made elsewhere when you come to sell or dispose of it.
Any excess losses can also be carried forward to help with future tax liabilities. Investors would need to make a claim for capital losses, usually through a self-assessment tax return.
Capital losses from the 2020-21 tax year need to be claimed by April 5 as there is a four-year window to claim losses.
6. Remember private residence relief
Relief on the sale of your main home is one of the biggest tax breaks of all. Between 2021 and 2022 homeowners saved £37.3bn in capital gains tax.
But private residence relief cannot be claimed on parts of property used exclusively for business use, although having a “temporary or occasional” home office is allowed. Nor will HMRC allow you to claim the relief if the property has been let out – this can be tricky to navigate.
With working from home being more commonplace, there have been fears people will compromise the tax relief available to them. But Mr Etherington said: “Generally speaking, it shouldn’t be a problem as long as the home office is in a room used for different purposes and not just dedicated for business.”
HMRC states having a lodger does not disqualify a property owner from claiming private residence relief, but Airbnb hosts and other short-term landlords can find themselves restricted.
