Will you need to start paying Capital Gains Tax from April?

If you thought that capital gains tax (CGT) was something only the super-wealthy needed to worry about, think again.

More people, who have saved hard and invested over the years, could be hit by a surprise tax bill, thanks to successive reductions to the CGT allowance. This is the amount of money (or ‘gains’) you can enjoy tax free when you sell an asset, like an investment or antique, that increased in value while you owned it.

Chris Springett, private client tax partner at wealth manager Evelyn Partners, explains: “From 6th April 2023, the CGT annual allowance reduced to £6,000 from £12,300 and from 6th April 2024, it will reduce again to £3,000.”

He told Saga Money that Government estimates suggest the changes will impact more than half a million taxpayers, with some 260,000 being forced to pay the tax for the first time.

He adds: “Anyone with investments like shares or funds (held outside an ISA or pension) may have to pay CGT when they sell them, if their profits exceed the new lower allowance."

“This includes anyone who owns shares through an employee share plan. Many people with a second property also need to be aware that they may have to pay CGT if they sell up.”

Anyone who has taken a punt on cryptocurrencies could also be stung as well as those selling so-called chattels – valuable possessions in their home, like antiques, art or jewellery - worth more than £6,000.

How much is capital gains tax?

The amount of CGT you might have to pay depends on both your rate of income tax and the asset you are selling. 

For most assets the rate is 20% for higher and additional rate taxpayers or 10% if you are a basic rate taxpayer. However, the catch is that to pay the lower rate of CGT, you still need to be a basic rate taxpayer (your total taxable income being under £50,270 per year) after your capital gain has been added to your income for the year.

However, when you are selling a property that isn’t your main home, such as a buy-to-let or holiday home, CGT would be payable at a rate of 28% for higher and additional rate taxpayers or 18% for basic rate taxpayers.

Laura Suter, director of personal finance at AJ Bell says the changes to the allowance could hit unprepared investors hard. “For a higher-rate taxpayer banking a capital gain this could cost them up to £600 more a year in tax, rising to £840 for a higher-rate taxpayer locking in gains on a second home, thanks to the additional rate of CGT on property.”

Capital gains need to be declared, either directly to HMRC using its real time service or in your annual self-assessment tax return.

What can I do to cut my bill?

The good news is that there is plenty you can do to legally avoid a potential CGT bill – but it’s easier for investors than second homeowners, thanks to the fact you can sell off investments in stages (i.e. half your shares) unlike property, which must be sold in one go.

Springett says: “The allowance cuts highlight the importance of using up each year’s ISA allowance for holding investments like shares and funds. All gains in an ISA are free from CGT - the same goes for pensions.”

He adds: “If you have any unused ISA allowance but also have any general investment accounts or employee share plans, you could transfer those holdings into an ISA by a process called ‘Bed and ISA’.”

So, if you haven’t paid the full £20,000 in an ISA this tax year (your current maximum allowance), you can sell investments in other accounts and immediately rebuy them within your ISA. You’ll just need to make sure all your accounts are on the same investment platform first.

So long as you don’t sell up more than your CGT allowance, there won’t be any tax to pay and your money will then be protected from tax in the future.

Alternatively, if you have a Self Invested Pension Plan (SIPP), you could top up your retirement pot instead, using the similar ‘Bed and SIPP’ process. This would also benefit from tax relief on your contribution and your money would grow tax free, but your pension income would be taxable when drawn out.

If you can get organised ahead of April 6th you can move up to £6,000 worth of capital gains into an ISA or SIPP without paying any CGT, but after that date the amount you can transfer tax free will fall to £3,000. It’s worth doing this as early as you can ahead of the deadline, as it can take time to perform.

For those that don’t have any ISA allowance left, or don’t want to tie up money in their pension, you can still use your CGT allowance each year, without cashing in all your investment or pulling out of the stock market altogether.

To do this you need to take gains out of an investment (by selling shares for example) before they go over the allowance threshold, as that would mean you have to pay tax on them, and then reinvesting that money somewhere else.

You can’t buy back the same investments straight away, but you can buy equivalents – switching from one FTSE 100 fund to another, for example.

This is arguably a bit fiddly, but it can be a helpful way to stopping gains accruing over the years and could prevent a hefty CGT bill when you do eventually sell the investment.

You just need to be careful that each time you sell and reinvest, you don’t sell so much that you trigger a CGT bill.

Lee Clark, a financial planner at wealth management firm Brewin Dolphin, says: “Even though the allowance is less generous than it was, making full use of it each year could reduce the risk of incurring a significant CGT liability in the future. It can’t be carried forward into the next tax year.”

While you might be eager to forget about any losses you’ve incurred on any of your investments, don’t. When you declare your gains to HMRC you’ll also be given the opportunity to declare any losses. 

These can be offset against your gains and reduce the amount of CGT you need to pay. So, if you had a £10,000 gain but had incurred a £2,000 loss, you overall gain would be reduced to just £8,000.

If you’re married, it’s also important to know that transfers between spouses and civil partners are tax free. Clark says: “This means assets can be transferred from one partner to the other to use each person’s annual CGT exemption.”

Get ahead

It might not be possible to avoid CGT altogether – especially if you are selling a property that obviously can’t be sold off room by room – but you may well be able to find ways to reduce your bill. 

The important thing is to plan ahead and find out where you might have a problem brewing – think about any ways you might be getting in extra income and work out how much you’ll gain. That way you’ll be able to make the most of the available allowances and reliefs each year to ensure you don’t pay a penny more than you need.

CGT can be confusing, but if it looks like you might have a significant bill in the pipeline, or your finances are complicated it might be worth talking to a professional adviser.

They’ll be able to look at your situation and recommend the right course of action for you (and spare you the worry of a run in with HMRC).