Capital gains tax (CGT) has traditionally been a tax that most people could ignore. If you happened to be caught within its grasp, you could consider yourself in a relatively wealthy minority. However, as has happened with higher rate tax, the reach of CGT has been growing and will extend further over the next few years. It is no longer a tax you can ignore and, like other taxes, needs to be built into your financial planning!
In the summer, HMRC issued their annual update on CGT receipts. The latest figures relate to 2021/22 because CGT liabilities are generally – other than for residential property – reported in the January of the tax year after the gains are realised. At £16.7bn, total CGT liabilities were up 15.2% on the previous year and almost double the level of 2015/16. The number of individual taxpayers also jumped by over 20% between 2020/21 and 2021/22.
Changes to CGT
In the Autumn Statement 2022, the Chancellor announced the following changes:
- The annual exempt amount (AEA) for individuals was reduced from £12,300 in 2022/23 to £6,000 in the current tax year and just £3,000 from 2024/25.
- The AEA available to most trustees remained at one half of that applicable to individuals.
- The provision to index-link the exempt amount was scrapped.
- The higher rate income tax threshold was frozen at £50,270 through to 5 April 2028.
- This has an impact on CGT because it means more higher rate taxpayers for whom the rate of CGT is 20% (28% for residential property), against the 10%/18% basic rate taxpayers suffer.
How will the changes affect you?
The above measures could drag you into paying CGT or at least mean you have to pay the tax more attention than you have in the past. At the time of the 2022 Autumn Statement, HMRC estimated that around 500,000 individuals and trusts could be affected, increasing to 570,000 in 2024/25. Of this group, HMRC estimated that 260,000 individuals and trusts will be brought into the scope of the tax for the first time.
What can you do?
Next tax year’s £3,000 annual exempt amount means that you should start planning now if you have investments that could be liable to CGT. The strategies to consider include:
Maximise the use of ISAs, which are free of CGT
This tax advantage once seemed a minor benefit, but that has changed in the new CGT world. If you have cash ISAs currently, it might be worth turning them into stocks and shares ISAs.
Do not waste your annual exemption
It has been many years since it was possible to sell a holding one day and buy it back the next to crystallise the necessary gain, but similar opportunities still exist.
If you are married or in a civil partnership, think about who should own what:
you each have your own annual exemption, meaning in this tax year you could realise gains of £12,000 between you with no CGT bill. Similarly, your partner may be a basic rate taxpayer, subject to 10% CGT while you have to pay 20%.
Consider carefully how you invest
For example, there is no CGT within pension arrangements, but there will normally be income tax on 75% of your retirement benefits.
There is (currently) no CGT on death. However, such a drastic planning option faces another tax obstacle – inheritance tax!
Disclaimer: The information provided is for general information only and is not intended to address the particular requirements of an individual or business. It does not constitute any form of advice or recommendation by Menzies Wealth Management Ltd and should not be relied upon by individuals in either making or refraining from making any financial decisions. Where necessary, you should seek appropriate professional advice before acting on any of the information provided.
To discuss how we could help put in place a financial planning strategy please contact us for more information.