How to reduce your Capital Gains Tax liability
- Shunil Roy-Chaudhuri
- 11 January 2023
- 10 mins reading time
Capital gains tax (CGT) is a tax on the profit (the ‘capital gain’) made from an asset that has increased in value, typically when the asset is sold. Around £15.3 billion in CGT payments was raised by HMRC in 2021/22, which was dwarfed by the £220.6 billion raised in income tax payments (1).
Capital gains tax is applied to profits made on the following types of assets:
Property that is not a main home
A main home if it has been rented out, used for business purposes or is very large
Investments, such as shares or funds, not held in tax-efficient schemes such as Isas or pensions
Valuable possessions worth £6,000 or more, apart from a car
But certain ‘wasting assets’, meaning those with a predictable life of 50 years or less, could be exempt from CGT (2). These can include plant and machinery.
You can be liable for the tax when you sell an asset for a profit, give it away as a gift (or transfer it to someone who is not your spouse or civil partner or a charity), exchange it for something else or receive compensation for it (perhaps via an insurance payout). For example, if you bought a sculpture for £10,000 and later sold it for £30,000, then you would have made a capital gain of £20,000. You may have to make a capital gains tax payment on the profit you have made on this asset.
But you only have to pay capital gains tax on profits above your tax-free CGT allowance, which, in 2022/23, is £12,300. Profits above £12,300 are then charged at the following rates (3).
So, if the seller of the sculpture was a basic rate taxpayer and this was the only capital gain they made in that tax year, then they would have to pay £770 to HMRC in capital gains tax, according to the following calculation:
Profit from sale of sculpture = £20,000
Minus: tax-free allowance = £12,300
Amount liable for CGT = £7,700
CGT liability at basic rate of 10 per cent = £770
But different rates apply to trustees or personal representatives of someone who has died. They pay 28 per cent on residential property and 20 per cent on other chargeable assets.
In his autumn statement on 17 November 2022, chancellor Jeremy Hunt said the tax-free allowance will be cut from £12,300 to £6,000 in April 2023 and then to £3,000 from April 2024 (4). On this basis the seller of the sculpture would, at the 10 per cent basic rate, have a CGT liability of £1,400 if it were to be sold in the 2023/24 tax year, and of £1,700 if it were to be sold in the 2024/25 tax year. This means some individuals could potentially benefit from realising capital gains in the 2022/23 tax year, when allowances are higher, rather than in subsequent tax years.
The Treasury rejected the possibility of aligning CGT rates with income tax rates in November 2021. But, with government debt having been driven up by Covid-19 and energy support schemes, the possibility remains for capital gains tax rates to go up in the future.
Capital gains tax rules currently differ for business assets, where sellers can potentially benefit from entrepreneurs’ relief (now called ‘business assets disposal relief’). In this case, qualifying business assets are subject to CGT of just 10% on the first £1 million of capital gains during your lifetime. Any profits greater than £1 million would face a capital gains tax rate of 20% for higher and additional rate taxpayers.
Although capital gains tax rules may initially seem quite straightforward, things become a little more complex when you drill down more deeply, which we will do now.
Capital gains tax bands
CGT rates are determined by your rate of income tax. Currently, basic rate income tax payers are those with annual income of less than £50,270. But some basic rate income tax payers could make taxable capital gains that push them beyond this basic rate threshold, as chargeable capital gains are added to income for tax purposes. So taxpayers would pay capital gains tax to HMRC at 10 per cent on non-property gains that fall within the £50,270 tax threshold and at 20 per cent for gains that exceed £50,270. Scottish taxpayers should use UK tax bands for calculating their CGT liability.
Transaction costs and improvements
Money spent on transaction costs or increasing an asset’s value can sometimes be offset against capital gains tax. For example, you can deduct the costs of buying or selling shares from your gains. In addition, the cost of improvements to a property (excluding redecorating) can be deducted from gains on its sale.
While you can be taxed on capital gains, you can offset these if you make capital losses. So if, for example, you made a £25,000 loss on the sale of a painting, this would more than offset the profit from the sale of the sculpture in the example above, which means you could have no capital gains tax to pay to HMRC overall. In fact, you can even use losses you’ve reported from previous tax years to offset current capital gains, and there is no limit as to how many years you go back. Moreover, losses don’t have to be reported immediately: you can report your loss up to four years after the end of the tax year in which the asset was sold or otherwise disposed of.
Shares in the same company
Let’s suppose you sell some of the shares you own in one company and that some of these shares were purchased at different times for different prices. To work out your capital gain you must first add up the cost of all these various purchases in this company’s shares. You then divide this total cost by the total number of shares held in the company, to give an average share purchase price.
Let us now suppose you have an average share purchase price of 40p and you sell 1,000 shares in the company for 90p each. In this case the purchase price will be considered to be £400 (1,000 x 40p) and the sale price £900 (1,000 x 90p), giving you a capital gain of £500.
But the capital gains tax rules differ for shares in one company that are sold and then bought back the same day and also for shares in one company that are sold and then bought back within 30 days. This can be quite a complex area and you may benefit from specialist advice.
Entrepreneurs’ relief applies to individuals
Capital gains tax rules on qualifying business sales apply to an individual taxpayer rather than for each business sold. So £1 million is the most a single person can claim for at the 10 per cent rate, no matter how many business assets were sold. You need to own at least 5 per cent of the company’s shares and voting rights to be eligible for this relief.
How to make CGT rules work for you
There are legitimate ways that aim to reduce your capital gains tax liability. Here we give you some tips on how to potentially achieve this.
Transfer to spouse or civil partner
People who are married or civil partners can often transfer assets to each other without paying capital gains tax. Transferring an investment to a spouse with a lower tax rate could reduce the CGT liability when it is sold.
Married couples or civil partners could consider transferring some assets into joint ownership. This can allow them to make greater use of tax-free allowances, as up to £24,600 of any gain could be tax-free once their individual £12,300 allowances for 2022/23 are pooled together.
Sell when tax is paid at a lower rate
If your income tax rate will fall in the future, then you could consider deferring the sale of an asset, as the capital gains tax rate is based on your income tax rate at the time of the sale. But it is worth remembering that tax thresholds and tax rates could change in the future.
Reduce taxable income
Paying or increasing pension contributions could reduce your taxable income. This could also have the effect of potentially bringing down your capital gains tax rate and reducing your CGT liability. In addition, schemes such as Isas can reduce your taxable income. This is because you do not pay tax on interest on cash in an Isa or on income or capital gains from investments in an Isa.
Spread share sales over several years
You could be liable for capital gains tax if you sell all your investments in one go. By selling them in tranches over several years, you could ensure that each year’s gain is within your annual tax-free allowance, potentially avoiding CGT entirely. This approach may be particularly useful for beneficiaries of employee share schemes, such as the save-as-you-earn (SAYE) scheme, enterprise management incentive scheme or company share option scheme.
(1) www.gov.uk, ‘HMRC tax receipts and National Insurance contributions for the UK: statistics table’, 21 December 2022.
(2) www.gov.uk, ‘Chattels and Capital Gains Tax 2019 (HS293)’, 6 April 2022.
(3) www.gov.uk, ‘Capital gains tax: what you pay it on, rates and allowances’, 5 January 2023
(4) www.gov.uk, ‘The autumn statement 2022 speech’, 17 November 2022.
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