It was announced in the Autumn Budget of 2022 that the Capital Gains Tax (CGT) Annual Exemption Amount (AEA) would reduce from £6,000 to £3,000 come the start of the new tax year on 6th April 2024[1]. Well, here we are, with Spring (and the start of said new tax year) just around the corner.
The move, along with a reduction in the Dividend Allowance to £500 – also from 6th April 2024 – is set to raise over £1.2 billion per year from April 2025.[1]
But what does this mean for those who may be affected?
Firstly, what is CGT?
CGT is a tax paid on the profit made from selling, giving away, exchanging or otherwise disposing of an asset, and make a profit. If the asset went up in value while you owned it, you may have to pay tax on the amount it made.
Is it likely to reduce again?
While nothing is ever set in stone, the government has stated that following this upcoming reduction, the CGT exemption amount will remain permanently fixed at £3,000 for individuals and £1,500 for most trustees.[2]
Who will be affected?
If you own an asset, such as property, the upcoming changes to the capital gains tax (CGT) exemption may impact you upon its disposal. The applicable CGT rates vary based on your earnings. For basic rate taxpayers, the CGT will be charged at either 10% or 20% (2024/25) for any qualifying asset. However, when dealing specifically with residential property or carried interest, the rates are set at 18% or 28% (2024/25) for higher or additional rate taxpayers. Therefore, in the context of property transactions, it’s essential to be aware that the CGT rates would be 18% or 28%, depending on your tax bracket.[3]
For those who are basic rate taxpayers but are pushed into a higher bracket once any capital gains are added, then a proportion of CGT may need to be paid at both rates.[3]
With the exemption amount for CGT lowering to £3,000 from the start of the 2024/25 tax year, it is possible that you will pay more tax on your assets than you would have done if disposing of them in this current tax year (2023/24).
What else do I need to know?
The reduction in the exemption amount for CGT is further impacted by the fact that inflation may have increased the value of any assets, therefore meaning a larger amount may be subject to tax.
This factored in with the fact that the Personal Allowance and higher-rate thresholds for income tax have been frozen at 2021/22 levels until 2027/28, means that an increasing amount of individuals could end up paying a higher rate of CGT.[4]
You should also be aware that CGT doesn’t roll over from one year to the next. If you’ve not used the allowance in the current year, there’s no carrying any forward.
Is it possible to reduce my amount of CGT?
There are a couple of measures you can take that may help to reduce the amount of tax you need to pay on any capital gains:
- You can transfer assets to a partner, meaning you could both take advantage of the full pre-tax allowance of £6,000 for 2023/24.[5]
- Declare any losses to HMRC as this may offset your gains.
- Check if you’re eligible for Principle Private Residence, which allows you to sell your main home without having to pay CGT provided certain criteria are met.[5] A financial adviser will be able to determine if you meet the conditions.
- Contribute more into a pension. This may change your CGT bracket and you could end up paying less.[5]
If there’s anything you’re unsure of, it’s always worth seeking professional advice. Knowing what your taxable assets are (and aren’t), what your allowance is and how and when to pay CGT can all affect how much you end up contributing. Our advisers are on hand to help you navigate tax allowances as we approach the tax year-end.
