TTR Barnes

From April 2023 we will see the implementation of the proposed reduction in Capital Gains Tax Allowance. Any taxpayer seeking to dispose of their assets will need to consider the impact of the reduced allowance on consequent tax liabilities.

Initially announced in the November statement 2022 by Jeremy Hunt, the reduction in CGT allowance will come into force from April 6^th 2023, halving it from the current rate of £12,300 to £6,000 for the tax year ending April 2024 and then halving again to £3,000 for the tax year ending 5^th April 2025.

Capital Gains Tax (CGT) is a tax on the profit made from the disposal of assets.  This could include assets such as shares (held outside of ISA/PEP), art or residential properties.** Importantly, the tax applies not only in the sale of assets, but can also apply when these assets are gifted – depending on the type of asset and to whom they are being gifted.

Individuals are currently granted a £12,300 annual tax-free allowance, known as the Annual Exempt Amount (AEA) – meaning that Capital Gains Tax is only payable when an individual realises total profits (gains) in excess of £12,300 when selling or gifting assets*.

*applicable from tax year ending April 2023, set to change to £6,000 for tax year ending April 2024. 

*There are different rules for non-domiciled UK residents.

**Some exceptions do apply.

There are 4 different rates of Capital Gains Tax, dependent on whether the disposal is of residential land/property and also whether the individual is a basic or higher/additional rate taxpayer.

Residential Land/Property CGT Rates

• Basic Rate Taxpayer: CGT rate of 18%
• Higher/Additional Rate Taxpayer: CGT rate of 28%

All Other Assets CGT Rates

• Basic Rate Taxpayer: CGT rate of 10%
• Higher/Additional Rate Taxpayer: CGT rate of 20%

It is worth noting that, in the instance where any capital gains move an individual into the higher rate threshold, then the higher rate will apply on any gains once this threshold has been exceeded.

A special rate of 10% applies to the sale of certain business assets, known as Business Asset Disposal Relief.

A full explanation of Capital Gains Tax is provided by HMRC here.

Any UK-resident individual seeking to dispose of assets after April 5^th 2023 where the gains are in excess of £6,000 will be impacted.  This includes some disposals of non-UK located assets by UK residents and also non-residents when carrying on trade in the UK and provided private residence relief does not apply.

Landlords and property developers will especially be impacted as the higher rate of Capital Gains Tax will apply to their property sales. CGT does not usually apply to a primary residence but there are exceptions to this rule.

Capital Gains Tax can also apply in the instance of transferral of assets during a divorce or separation.

In a real-life example the decrease in allowance could impact in the following way:

A homeowner purchases a property for £220,000 and then sells it at a later date for £300,000.   The capital gains realised total £80,000.  The amount of CGT then paid would depend on whether the individual is a basic or higher/additional rate taxpayer.

• At the current rate of allowance, a basic rate taxpayer would pay the current residential CGT rate of 18%, applied once the £12,300 allowance had been deducted, giving a total liability to pay of £12,186. This liability would change to £13,320 when the allowance reduces to £6,000.
• At the current rate of allowance, a higher/additional rate taxpayer would pay at the current residential CGT rate of 28%, applied once the £12,300 allowance had been deducted, giving a total liability to pay of £18,956. This liability would change to £20,3720 when the allowance reduces to £6,000.

Trustees (already subject to a reduced exemption allowance of £6,150) will see this further reduce to £3,000 for the tax year ending April 2024 and then to £1,500 for the tax year ending April 2025.

For those individuals forecasting significant gains within their asset portfolio, it may now be wise to assess current positions and plan for future asset disposals. This should also include the disposal of assets through the process of inheritance, in which instance capital gains could also apply.   Possible areas to consider include the following:

• Making the most of the current rates of the AEA allowance

It may prove efficient to move forward the planned sale of any assets and fully utilise the current £12,300 rate of AEA allowance – particularly if you are a higher/additional rate taxpayer.  The allowance can not be carried forward so it is important to act quickly if you wish to make the most of the current rate.

• Splitting any capital gains over multiple tax years

You could also consider splitting the sale of your assets over multiple tax years, if your asset portfolio type allows. For example, selling some shares in one year and the rest in the following year.

• Transferring assets to a spouse or partner

Give that a spouse, partner or civil partner has their own individual allowance, it could be judicious to transfer ownership of assets on a “no gain, no loss” basis and is particularly tax efficient if they pay a lower rate of Income Tax.

• Offset losses and use cost deductions against any capital gains

Any losses can be offset against your capital gains within the same tax year – and losses can be carried forward to be offset against future years’ tax gains indefinitely should they exceed gains within any given tax year.  Certain costs involved in the improvement/sale of the assets can also be offset against your CGT liabilities, such as professionals’ fees or property expansions.

• Make the most of charity donations

CGT does not apply when donating assets to a charity, and the value can also be offset against any taxable income.

• Use schemes such as the Enterprise Investment Scheme

You could benefit from generous relief from Capital Gains Tax by investing in early start-ups.  The Enterprise Investment Scheme (EIS) is just one of the schemes set up by the government to encourage investment in fledgeling companies.

• Transferral of assets into pensions and/or ISAs

CGT does not apply to any assets held within ISAs or a pension and pension contributions can also have a positive impact on the rate of tax paid.

• Investment Bonds

Again, investment bonds are not subject to CGT and tax liabilities can be deferred or mitigated by assigning proportions to basic rate or non-taxpayers.

• Reducing your rate of Income Tax

Reducing your rate of Income Tax can also help reduce your CGT liabilities, for example through increased pension or charity contributions.

You should act now and consult your tax planning and/or financial advisor to understand how you can best plan for your assets before April 2023. Doing so may mean that you could reduce your future CGT tax liabilities, particularly if you are a higher/additional rate taxpayer.

Even if you have not typically paid Capital Gains Tax until this point, you should assess if your usual asset disposal gains will now place you over the threshold.

Please be aware that any action regarding the holding or disposal of your assets will likely have an impact on your tax liabilities and ongoing planning and strategy. You should always take advice from a professional before making any decision.

All information correct at time of going to print/live and on the best knowledge and understanding of the author at the time. This article is for general information only and does not constitute financial advice or recommendations for individual circumstances. No responsibility is taken for any actions taken on the base of the information within this article.