Capital Gains Tax - Special Bulletin
Zoe Taylor • 21 July 2023
Capital Gains Tax (CGT) is a complicated tax that needs careful planning for. It is very easy to fall foul of some of the rules, especially if you are not taking personalised financial advice, especially when selling property.
With the drastic cut to annual exemptions, and despite the rising house prices, the CGT regime is much less generous than it was 15 years ago, so extra work is required!
It is so important to think about the long-term plan, or exit position as well as the short-term quick wins, and if there are going to be capital gains at play, figure out how to best mitigate these with the top tips below.
Here are some answers to the most frequently asked questions about this often-misunderstood tax, and some ways to reduce, delay or even completely mitigate the bill!
What is Capital Gains Tax?
CGT is a tax on the profit you make when you sell something that has increased in value. CGT applies only to the gain, not the amount of money you receive for the asset. So, if you bought a property for £100,000 and sold it for £150,000, your capital gain or profit is £50,000. That’s the amount assessed for CGT.
Every tax year you have a personal CGT allowance. In 2023/24 it’s £6,000, reducing to £3,000 from April 2024 for individuals. This means you can currently realise gains of up to £6,000 (after taking away any losses and applying any reliefs) and pay no CGT – but everything over that will be subject to tax.
If you don’t use your allowance in a tax year, you can’t carry it forward like some other tax allowances.
How much Capital Gains Tax will I have to pay?
The rate of CGT that you will pay will depend on your other income.
If you are a basic-rate taxpayer and the gains on any assets sold are within your Income Tax basic rate band, you’ll pay 10% CGT. However, for property investments, you’ll pay 18% on residential property that is not the home that you live in.
If you’re a higher-rate taxpayer, or your gains combined with your income bring you into the higher rate, you’ll pay 20% for most assets and 28% on gains made by the sale of residential property. If your combined income and gains are above the higher rate threshold, you’ll pay 28% on residential property.
If you are selling property, the HMRC has a fantastic calculator!
How can I reduce my Capital Gains Tax bill?
There are a number of options if you want to reduce the amount of CGT that you pay. It will, however, be dependent on your personal circumstances, and you may need to manage the reduction over time – which is why expert financial advice is very important.
1) Gift assets to a spouse or partner
Most sales or transfers of gifts between spouses or civil partners are free from CGT. By transferring assets to them, you can take advantage of your combined CGT exemptions, and potentially keep more of the gain at a lesser rate. So, you could ask a solicitor to amend the deeds and gift 50% of a solely owned property to help reduce the CGT payable.
2) Increase your pension contributions
The amount of CGT you pay is linked to your rate of income Tax. So if you are able to pay more into your pension, you’ll be reducing your taxable income – which may alter your tax band, and reduce the rate of CGT that you’re charged.
3) You can gift assets to your spouse or partner
Most transfers of capital between spouses or civil partners are free from CGT. By transferring assets to them, you’ll be able to use both of your annual allowances – making the first £24,600 of the gain tax-free. But only until April 5th 2023. In 2023/24, the amount would be £6,000 and in 2024/25, just £3,000.
4) Maintain or improve your assets
If you make improvements to a holiday home, you can write off those costs against tax. Make sure you keep all your receipts and information during the course of ownership to make it easier to work out your costs when you come to sell.
What happens if I sold my furnished holiday let business?
You may be able to qualify for Business Asset Disposal Relief (formerly Entrepreneurs’ Relief) if you’ve owned the business for at least two years. The relief reduces the rate of CGT on disposals of certain business assets to 10% up to £1million.
How do I declare capital gains?
When you sell assets and have made gains of more than £12,300, you must declare it to HMRC.
How and when you do this depends on the asset or assets you’ve sold. If you sell a property, you have just 60 days to report your gain and pay the tax due.
To do this, you’ll need to set up a Capital Gains Tax on Property account on the government website.
If you made a gain selling or giving away other assets, you can report and pay the tax straight away using the real-time service on the government website. Or you can report it in a self-assessment tax return in the tax year after you sold the assets.
HMRC works out how much CGT you owe, how to pay it and when the deadline is.
Can I defer or ‘roll-over’ my capital gains?
Yes, using EIS deferral relief. Capital gains tax (CGT) arising on sale of a property can be deferred by investing into an EIS investment. To qualify for the relief the investment must be made during a period covering one year before the gain arose and three years thereafter.
For the purposes of deferral relief, it’s the capital gain (not the proceeds of sale) that should be invested.
You would need to pay the CGT bill within 60 days, then you can reclaim the CGT paid upon proving you have invested into these specific types of shares.
The HMRC would then not seek to recover any CGT whilst you continue to hold the shares, and ultimately the bill dies with you on death. Alternatively, you could annually encash some of the shares within your CGT exemption.
This blog is designed for education purposes only and does not constitute financial advice, which is given on a bespoke basis relevant to a client’s specific circumstances.
The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.
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The amount per month may seem relatively modest, so it’s easy to allow it to merge into a household budget or day-to-day spending. "Think how powerful that amount could be – and you wouldn’t miss it, as you’ve had to pay the mortgage monthly for the past 25 years anyway." Thinking well ahead As with all financial planning, it’s never too early to start thinking about how to balance paying off your mortgage with saving for retirement. If, for example, you pay off your mortgage at 57 and work until you’re 66, you will have nine years of monthly savings to contribute towards your retirement. And if that retirement is the long, healthy one we all aspire to, those additional funds may be vital. 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The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances. * How does pension saving change when individuals complete repayment of their mortgage?, Institute for Fiscal Studies, Dec 2020 ** https://www.ons.gov.uk/peoplepopulationandcommunity/healthandsocialcare/healthandlifeexpectancies/articles/lifeexpectancycalculator/2019-06-07
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To plan for your retirement, it's important to consider your projected retirement age and life expectancy. This will help you estimate the number of years your pension savings should last. While it's impossible to predict with certainty, there are some helpful facts that can provide a reasonable indication. The average life expectancy at birth in the UK is just over 79 years for males and just over 83 for females. People who’ve already made it to 65 can look forward, on average, to nearly another 19 years if they’re male and just over another 21 years if they’re female, meaning seniors today can expect to live well into their 80s. If you're considering retiring in your mid to late 60s, you should plan on having enough pension income for at least 20 years. This is especially important if you want to retire earlier, as you usually won't be able to rely on your state pension income until you're at least 67. 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If you are not registered for Government Gateway, you can call 0800 731 0175 to order a BR19 form to check on your state pension entitlement – retirement age, likely amount, and any gaps in your national insurance history. Lost a pension? First, try the tracing service on www.gov.uk/find-pension-contact-details. They have records of over 200,000 workplace and personal pension schemes to try to find the contact details you need. Whether these figures scare you, or make you feel comfortable that you’re on track for the retirement you want, it’s important to remember that everyone’s circumstances are different and therefore it’s always helpful to seek advice from an expert. A good financial adviser will take the time to assess your retirement goals – such as what age you’d like to retire and what kind of lifestyle you’d like to lead – then examine your current finances and work out a realistic plan that will help to get you there. These figures are for illustrative purposes only and based on Which? calculations. The levels and bases of taxation and reliefs from taxation can change at any time. Tax relief is dependent on individual circumstances. References 1. The PLSA/Loughborough University Retirement Living Standards, 2019 (Based on 26 qualitative discussion groups across 13 UK locations, with almost 250 participants from a wide range of socioeconomic and geographic backgrounds.) 2. ONS, 'National life tables – life expectancy in the UK: 2017 to 2019', September 2020 3. Which?, 'How much will you need to retire?', November 2020 (based on responses from 6,300 retired and semi-retired couples Which? members in April 2020) Links from this website exist for information only and we accept no responsibility or liability for the information contained on any such sites. The existence of a link to another website does not imply or express endorsement of its provider, products or services by myself. 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Being a little more organised and seeking what can be done before the end of the tax year can help you get in a much better financial position. From ringfencing savings so they grow free of income & capital gains tax, to putting money away for the kids or gaining tax relief, lots of good can come from making plans before April! 3. How can I pay less tax in my business? The old saying ‘work smarter, not harder’ rings true here. There are all sorts of expenses that can be run through your business that you might be missing, from uniform and use of your home working equipment to pension contributions or relevant life insurance. Getting profits out of your business without paying lots of tax can be made easy for directors using carry forward allowances to get up to £180,000 into your own pension whilst gaining corporation tax relief (so it only costs your company £ 145,800). 4. Is there really a financial penalty for being a woman? Women historically have been behind men in the financial stakes, but with generational changes and the help of auto enrolment schemes, the proportion of women aged over 30 saving for retirement is at an all-time high. 59% of woman and 60% of men are now saving adequately for their retirement (which means saving at least 12% of their income or in a defined benefit scheme). 1 However, with 75% of all part time workers being women (largely due to caring responsibilities) and an annual medium difference in wages between men & women of £10,800 (men earning more), this means women will end up with a £100,000 pension deficit on average over a 44-year career. 55% of men checked how their investments were doing during the pandemic, but only 33% of women did so – women’s risk psychology and lower financial engagement is reflected in their pensions returns which, without advice, fell three times more than men’s. 2 5. Should I use a financial adviser? Recent studies have been investigating the ‘value of advice’ – the value added by and adviser above simple investment returns. They have quantified this as a further 4.08% per annum due to a number of factors, including rebalancing of funds, stopping clients making behavioural mistakes such as disinvesting at low market points, changing legislation, tax planning and management. 3 Around the house I’m happy to do DIY, but I always pay an expert to do the stuff that’s not safe for me to do or that I don’t have time to do. It’s no different with investing – think honestly if you have the time and know-how to choose between different funds, build a portfolio and manage it regularly. The most popular reasons for seeking advice include; To have a sounding board, and share the responsibility of making financial decisions, Fear of missing out on good investment opportunities or specialist advice, Fear of making bad decisions – for example taking on too much risk. Approaching a milestone or event such as retirement, receiving an inheritance, divorce or purchasing a property. 6. How can I protect my income? Building a solid foundation is crucial to ensure that you are resilient, whatever life throws at you. Keeping at least 3 months’ worth of your typical spending aside as an emergency fund brings peace of mind – something that has been highlighted recently during the pandemic. A combination of savings and adequate protection policies can give you a solid base to work from. Sadly, April 2020 saw 83% more life insurance claims (31% Covid-19 deaths, 80% male, average age 64) year on year, and GoFundMe saw a 192% year-on-year rise in the number of pages raising money in the “memorial and funeral” category. 2 Income protection has come into the spotlight also, with many of us having had a stark reminder of how much we depend on our ability to work and earn to support ourselves and our families. 7. Should I repay my debt? Often our biggest lifetime purchases are property, and the length of time the debt is spread over means even tiny interest rate change can have huge effects. Look to take advantage of the current decades low interest rates and consider fixing low rates in for peace of mind. Prioritise expensive debts that need repaying, such as credit cards and unsecured loans, even if it’s just reducing the amount outstanding. In years gone by, people have tended to receive inheritances while they were still raising their own families and buying homes, helping reduce debt early and allowing payments to be redirected to other financial goals like investments and pensions. However, with older generations increasingly expected to live into their 80s and even 90s, recent years have produced a shift – and one that poses a real challenge for women in the so-called ‘sandwich generation’ - those raising children and caring for ageing parents at the same time. Now, the financial boost arrives later in life, with the average age of inheritance lying between 55 and 64. This means we are all more responsible and need to be more financially astute and independent than ever before. 8. Have I been a victim of Fraud? 2020 saw lots of financial fraud attempts, particularly with unregulated investments, pension ‘liberation’ schemes, wine investments and cryptocurrency scams. Typically, with legitimate firms and investments, you will be covered by the financial ombudsman or the financial services compensation scheme (FSCS) – but unauthorised firms or firms stealing a legitimate companies name when cold calling are not. You can check the FCA Warning List for firms to avoid (there are over 600 of them). This list isn’t exhaustive however, although generally speaking if you get a cold call about your pension or an investment opportunity, the safest thing to do is hang up - it’s illegal and probably a scam. Even if it’s not a scam, you may also be targeted for unregulated investments, which don’t offer the same protections – such as gold, wine, UK forestry, development land or hotels. Fraudsters can be articulate and financially knowledgeable, with credible websites, testimonials and materials that are hard to distinguish from the real thing. Unrealistic returns, flattery and time pressure are all warning signs - if it sounds too good to be true, it probably is. Check out https://www.fca.org.uk/scamsmart for loads of help and advice. 9. What can I do if I can’t find my pension? The Association of British Insurers (ABI) estimates that more than 1.6 million pension plans, worth £19.4 billion are currently lost or unclaimed. 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You have a better chance of success if you are hopeful of the outcome and will make more positive decisions along the way. “When you are a pessimist and the bad thing happens, you live it twice,” Amos Tversky Dream big! Set your ambitions high and you’ll have a better chance of a great outcome. It’s much more satisfying to reach 75% of a challenging goal than 100% of an easy one. Diversify. You can’t control market ups and downs, but you can do something to help control how much your investments are affected by them. Different types of investments behave in different ways at different times. So, if you’re investing in only one or two kinds, you could be exposing yourself to quite a degree of risk. Making sure that your money is spread across different types of investments and geographical locations - called diversification – could mean that the overall value of your investments is less likely to fall as dramatically than if you were just invested in one or two kinds. Mighty oaks grow from little acorns grow. Small regular contributions soon add up – between growth and compound interest the value can quickly build so don’t be conscious of seeking advice just because ‘wealth management’ doesn’t seem quite the right phrase to use right now! References 1 Women and Retirement 2020 Standard Life 2 Living a financially resilient life in the UK beyond Covid-19 – CII IWF 3 https://russellinvestments.com/Publications/US/Document/2017_Value_of_Advisor_study.pdf 4 https://www.plsa.co.uk/Press-Centre/Press-Releases/Article/PLSA-launches-Retirement-Living-Standards The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.