Change to capital gains tax rules – what you need to know

Over the next two years, the tax-free allowance for capital gains is being slashed by over 75%. In this article I discuss the rules on capital gains tax and five ways you can reduce your potential tax bill.

Whilst this article contains information and tips – it is not tax advice or a personal recommendation. If you need help with tax or your investments you should get professional, regulated advice.

What is capital gains tax?

Capital gains tax (CGT) is charged on gains made when an asset is sold or transferred.

The most common example is selling an investment, such as a share, but tax could also be due if you transferred an investment, business assets or even crypto-currency to another person.

Any gains you make on investments held in an ISA or SIPP are sheltered from CGT and profits made on your main private residence and most personal items worth £6,000 or less are exempt.

You get a tax-free allowance for gains each tax year, but above this you’ll need to pay CGT.

What’s changing?

The main news is a huge cut to the tax-free allowance, officially known as the Annual Exempt Amount (AEA). The AEA is the amount of gains you can make on selling investments or assets in a tax year before they start to be taxed.

The AEA cannot be carried forward if you do not use the full amount in a year.

For individuals and personal representatives (of an estate) the AEA is currently £12,300.

The below summarises the changes announced in the Autumn Statement in November 2022.

Date	Annual Exempt Amount (AEA)*
Up to (and including) 5 April 2023	£12,300
6 April 2023 – 5 April 2024	£6,000
6 April 2024 onwards	£3,000

* For most trustees, the AEA is half of the amount for individuals

The actual rates of tax will remain unchanged and the ability to use losses to offset gains is also staying.

But the reduction in the AEA will mean a higher tax take as well as more people paying capital gains tax meaning that good planning and the use of available allowance is more important than ever.

HMRC’s own notes estimate that “260,000 individuals and trusts will be brought into the scope of CGT for the first time”. For most, that’ll mean tackling a tax return for the first time or having to complete extra sections on what they already submit each year along with evidence and calculations. You don’t get a ‘bill’ for CGT, you must report and pay it to HMRC yourself.

Rates of CGT

To work out the rate of tax on any gains, you’ll need to know your income for the year. It also depends on the type of investment you’ve sold.

Any part of the gain that still sits within the basic rate band for income tax when added to your taxable income will be taxed 10%. Gains that sit above the basic rate band will be taxed at 20%.

The calculations, gains and any tax due will need to be reported on your annual self-assessment tax return.²

Sarah earns £48,000 a year and has made a gain on the sale of her share portfolio. After deducting the annual exempt amount and any costs of selling the shares, her chargeable gain is £5,000.

When you add the gain to Sarah’s income, you can see that part of the gain sits below the basic rate band¹ of £50,270 and the rest above.

In Sarah’s case, £2,270 of the gain will be taxed at 10%, and the remaining £2,730 taxed at 20%.

Change to capital gains tax rules – what you need to know, chart 2

Any gains relating to the sale of residential property will be taxed at 18% and 28% respectively. Crucially the rules say that residential property gains must be reported to HMRC within 60 days of completion, rather than on an annual tax return with more generous deadlines.

5 ways investors can reduce their potential tax bill

Use or lose the annual exemption
Transfer assets to your spouse or civil partners
Make the most of tax-free wrappers
Look out for losses
Using a pension contribution to lower taxable income

I’ve talked about the rules, so what can investors do now and in the future to plan ahead and reduce the tax they might pay?

1) Use or lose the annual exemption (AEA)

The AEA will remain at £12,300 for the rest of the 2022/23 tax year, before reducing to £6,000 on 6 April 2023 and down again to £3,000 from 6 April 2024.

You cannot carry forward any part of the AEA you don’t use so if you have a large potential gain, it might be worth making the most of this year’s higher AEA before it starts to reduce.

Just be careful if you intend to buy the same holding back outside of an ISA or SIPP. If you do this within 30 days, then you would be deemed to have bought it back at the original cost and not realised any gains. This tax avoidance rule is sometimes known as the ‘bed and breakfast’ rule. There’s more on how to use ISA and SIPP tax wrappers below.

2) Transfer assets to your spouse or civil partner

These transfers are exempt from CGT as they happen on what is known as a ‘no gain, no loss’ basis. There is no limit to the amount of value of these transfers either.

This is particularly useful where you are planning to sell an investment and your spouse or civil partner has not used their own AEA. In addition, if they have a lower income than you it could mean that any tax due will be at a lower rate on the gain that exceeds any remaining tax-free allowance.

When you transfer investments to a spouse or civil partner, make sure you keep a note of the original cost to you as this also transfers across to them with the investment and will be needed when they come to sell themselves.

3) Make the most of ISA and SIPP tax free wrappers

Gains on investments held in ISAs and SIPPs are sheltered from CGT altogether. The ISA allowance is £20,000 per tax year (across all types of ISA) per person and this will become even more valuable as the reduction in the AEA starts to bite.

If you want to make the most of your allowances and keep the same investment(s) then you might consider a Bed & ISA transaction. This involves selling an investment and using the cash proceeds to buy it back within the ISA as quickly as possible. There might be stamp duty and dealing costs to pay but any gains going forward will be completely tax free. Find out more here

The investments held within your SIPP get the same tax-free treatment – but do keep an eye on the amount you can pay in as this is limited by your earnings and there’s also the annual allowance to consider.

4) Look out for losses

Losses made in the current tax year can be offset against any gains before you deduct the tax-free allowance (AEA).

If the current year losses exceed your gains, you can carry forward the difference, but you can’t use the AEA first to create a loss.

Any losses you have from previous years can then be carried forward indefinitely, but you should make sure you register the losses with HMRC within four years after the end of the tax year in which you made the sale in question.

5) Use a pension contribution to reduce taxable income

Not only do you get cash inside your SIPP to invest free of CGT, but the gross value of the contribution also has the effect of extending your basic rate tax band.

This is important as this can determine the rate of CGT you pay for the year. Any gains that now fall within the (extended) basic rate band when added to income for the year would then be taxed at 10% instead of 20%.

Let’s revisit our example of Sarah – she has income of £48,000 still and has made a £5,000 gain after her AEA, but she has also made SIPP contribution of £4,000 from her income after tax.

The SIPP will receive tax relief of £1,000 – meaning a total of £5,000 gross is available to invest inside the pension. But this also extends her basic rate tax band from £50,270 to £55,270.

As the chart shows, the whole of her taxable gains now sits within the basic rate band meaning she pays CGT of 10% on all of it, rather than some at the higher rate, and she also has £5,000 extra in her pension.

Change to capital gains tax rules – what you need to know, chart 2

If you have used your pension allowances or cannot make a pension contribution, you can also lower your taxable income by donating to charity. You can also claim gift aid on the donation if eligible.

¹Scotland sets its own rates and band of income tax but for the rest of the UK, the basic rate tax band currently stands at £50,270 and will be frozen until April 2028.

²Trustees and personal representatives also pay CGT at the ‘higher’ rate of 20% (or 28% if the gain relates to residential property).

These articles are for information purposes only and are not a personal recommendation or advice.

How you're taxed will depend on your circumstances, and tax rules can change. Tax, pension and ISA rules apply. Remember that the value of investments can change, and you could lose money as well as make it.