Why it's Time to Act Now if you want to Beat Capital Gains Tax

News | by Niamh Docherty
HM Revenue and Customs

Thousands more people will now be facing a higher Capital Gains Tax (CGT) liability after the Government lowered the threshold for the current tax year. But even bigger changes are looming on the horizon – particularly if there is a change of government at the next election – so if you want to avoid being hit with an even larger CGT bill, the time to act is now.

Change #1 – Lowering the tax-free limit by more than half

More than 300,000 taxpayers pay CGT (paid on the profits from the sale of property or other chargeable assets), up from less than 200,000 a decade ago – and even more people will find themselves liable for CGT since the start of April 2023, with the threshold having been lowered from £12,300 to just £6,000.

Change #2 – Lowering the tax-free limit by half… again!

But this is only the start. From next year, the limit will come down again to just £3,000. This makes it even more likely that selling an asset will result in a tax charge and is likely to lead to a flurry of activity as taxpayers hurry to dispose of their assets before the next deadline.

What does this mean for you?

Capital taxes (also including Stamp Duty and Inheritance Tax) make up nearly a fifth of the Government’s tax income – behind the big four of Income Tax, National Insurance, VAT and Corporation Tax [1]. The Office for Budget Responsibility estimates that CGT alone will raise £15.9 billion in the most recent tax year, equivalent to £560 per household. And, although tax receipts are forecast to dip over the next couple of years, by 2026/27 it’s estimated that CGT will generate nearly £18 billion [2].

How this impacts you depends on your tax bracket. Higher-rate taxpayers pay 28% on residential property (although not if it’s your primary home) and 20% on other chargeable assets above the threshold. Basic-rate taxpayers pay 10%, and 18% for property.

So, for example, if a higher-rate taxpayer is selling a property and makes £20,000 profit, before April that would have meant a CGT bill of around £2,156. For this financial year, that charge will rise to £3,920. And next year it will increase to £4,760.

Change #3 – Will a Labour government raise the CGT rate?

In addition to the lower CGT threshold, there’s also speculation that the rate levied on capital gains could increase significantly too.

A General Election has to be held by the end of January 2025 at the latest and Labour, who currently hold a 23-point lead in the polls [2], are under pressure from their MPs and its membership to introduce more wealth taxes – including an increase in the CGT rate. And whilst Labour hasn’t committed to anything yet, there is significant support for the move among Labour voters.

How much could the GCT rate rise under a Labour government?

No figures are confirmed as yet, but the Institute for Public Policy Research, a think tank that Labour has looked to before for policy inspiration (such as a windfall tax for energy companies) wants to raise CGT to the same rate as Income Tax, estimating this would raise £50 billion over the next four years.

Considering the basic rate of Income Tax across the UK is 20% and the top rate 45% (47% in Scotland) this would be a substantial jump from current levels.

What you should do now

The time has already passed to avoid that first drop in the CGT threshold. But there are still options to help you reduce your liabilities before the limit falls even further next year.

Are your savings as tax efficient as possible?

For example, you could put your money into a ‘wrapper’ exempt from capital gains, such as an ISA (with a current tax-free allowance of £20,000 per year).

Can you reduce your taxable income?

Paying more into your pension or making charitable donations could potentially restore you to the basic rate, or if you have a partner who pays income tax in the lower tax bracket, you could transfer your allowance (assuming that they have not already used theirs). Married couples can effectively double their CGT-free allowance (to £12,000) in this tax year.

Have you made any losses?

Remember that CGT only applies to net gains. When filing your annual tax return, you can carry forward capital losses, which could help offset profits elsewhere.

And finally, is it time to sell?

If you already have plans to sell a property or other assets, it might be worth considering bringing these plans forward, to realise capital gains now rather than later. However, this course of action should only apply if ‘taking profits’ fits in with your overall long-term plan. Tax rules are complex and it’s important therefore not to make knee-jerk reactions that might harm your long-term strategy. That’s why it’s always best to seek advice first. If you have any questions about your potential CGT liability or your wealth and estate planning, please don’t hesitate to contact me and I’ll be happy to discuss with you the best course of action to optimise your assets and mitigate your CGT liability.

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