On 29 July 2024, the new chancellor Rachel Reeves gave a speech claiming that her party had inherited a £22 billion “black hole” in the budget, as planned government spending exceeded tax revenues.
During her speech, she laid out the immediate actions she would take to make savings. These include halting infrastructure projects, cancelling upcoming changes to care funding and stopping winter fuel payments to pensioners who are not on benefits.
However, these changes won’t account for the full £22 billion gap between spending and tax revenues, and Reeves warned that “more difficult choices” are coming in her first budget on 30 October 2024.
Yet, she reiterated Labour’s promise to not raise taxes on “working people”. This includes Income Tax, National Insurance (NI) and VAT.
As a result, there is much speculation about where the additional funds will come from, with changes to Capital Gains Tax (CGT) high on the list of possibilities. This could be especially likely in light of the changes made by the previous Government in reducing the allowance from £12,000 to the current £3,000.
Read on to learn how you could be affected by changes to CGT in the future, and five ways to potentially mitigate a large bill.
You may pay Capital Gains Tax when selling or transferring ownership of certain assets
CGT is a tax on your gains from selling or transferring ownership of certain assets. So, if you purchase an asset and then later sell it for more than it cost, you may pay CGT on the difference. Bear in mind that you only pay CGT on profits, not the full value of the sale.
Qualifying assets that may attract CGT include:
- Stocks and shares held outside an ISA
- A property that isn’t your main home
- Business assets
- Most personal possessions worth more than £6,000 (excluding your car).
In the 2024/25 financial year, you can make profits of up to £3,000 from selling or transferring ownership of qualifying assets without paying tax. This is known as your “Annual Exempt Amount”.
You may pay CGT on any profits that exceed your Annual Exempt Amount and the rate you pay depends on your Income Tax bracket. You could pay:
- 10% if you’re a basic-rate taxpayer (18% for a residential property that isn’t your main home)
- 20% if you’re a higher- or additional-rate taxpayer (24% for a residential property that isn’t your main home).
For example, if you purchased some shares for £10,000 and later sold them for £20,000, you’d make a profit of £10,000. Once you apply the Annual Exempt Amount, which is currently £3,000, you pay CGT on the remaining £7,000.
As a higher- or additional-rate taxpayer, this would mean you pay £1,400 in CGT.
There are concerns that Labour could increase the rate of Capital Gains Tax in the future
We can’t know what changes Labour might make to CGT, if any. However, one potential option is to increase the rate of CGT and bring it in line with Income Tax rates.
Using the previous example, this would mean that instead of paying £1,400 in CGT, a higher-rate taxpayer would pay £2,800 and an additional-rate taxpayer would pay £3,150.
Alternatively, Labour could reduce the Annual Exempt Amount further, meaning that you’re more likely to pay CGT.
Fortunately, there are several ways to potentially mitigate a large CGT bill in the future. Here’s how…
Five ways to potentially mitigate Capital Gains Tax
1. Use your full ISA allowance
Stocks and shares held in an ISA are free from CGT. You also don’t pay Dividend Tax or Income Tax on assets held in an ISA.
In the 2024/25 tax year, you can contribute up to £20,000 across all your ISAs. You may want to use as much of this allowance as possible before investing elsewhere, so you can potentially reduce the CGT you pay in the future.
2. Be strategic with your Annual Exempt Amount
If you plan to sell assets that could attract CGT, it could be sensible to strategically use your Annual Exempt Amount. For example, if you purchased shares for £10,000 and they are now worth £16,000, you would make a profit of £6,000 if you sold them. After applying the Annual Exempt Amount, you would then pay CGT on the remaining £3,000.
However, if you split the sale across two financial years, you might only make profits of £3,000 in each year. Provided you didn’t make any other capital gains in that year, you wouldn’t exceed your Annual Exempt Amount, so you wouldn’t pay CGT.
3. Transfer assets to your spouse or civil partner
If you pass assets to your spouse or civil partner and they later sell them, they could still pay CGT. This is calculated based on the original value of the asset when you purchased it, and the value when they eventually sell it.
However, you benefit from using both your Annual Exempt Amounts. So, using the previous example, if you bought shares for £10,000 and they are now worth £16,000, you could pass half of them to your spouse.
Then, if you both sold your shares, you’d each make profits of £3,000. In doing so, you’d both remain within your Annual Exempt Amount and wouldn’t pay CGT, provided you haven’t made any other gains in that financial year.
Yet, if you sold all the shares yourself, you’d make profits of £6,000 and would probably have to pay some CGT.
4. Draw income efficiently
The rate of CGT you pay is based on your Income Tax bracket. As such, if you draw income efficiently and remain in the basic-rate tax bracket, you could pay less CGT.
This may not be an option if you’re working and your salary pushes you into a higher tax bracket. However, if you’re retired, you may be able to reduce the amount of income you take flexibly from your pensions. Instead, you could draw from other sources such as ISAs, which don’t attract Income Tax. This may help you stay in a lower tax bracket.
If the Labour government does increase the rate of CGT to bring it in line with Income Tax rates, this strategy could be even more beneficial.
5. Seek professional advice
The rules around CGT can be complex and it could be difficult to keep up with changing legislation. Unfortunately, if you fail to understand any changes, you risk making costly mistakes.
That’s why you may benefit from professional advice. We can help you stay up to date with new legislation and find ways to mitigate CGT now and in the future, so you can retain more of your wealth.
Get in touch
We can help you prepare for potential changes to CGT and other taxes in the future.
Email hello@fcadvice.co.uk or call 0333 241 9900.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients 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.
The Financial Conduct Authority does not regulate tax planning.
