What might spark a CGT bill?

With basic rate taxpayers now facing doubling capital gains tax (CGT) rates, and with the exempt amount a quarter of its previous level, it is no surprise that considerably more CGT is being paid to HMRC.

Given the changes taking place, it is important to understand the rules.

Rates of CGT

Basic rate taxpayers now pay CGT at the rate of 18%, with a 24% rate for higher rate taxpayers. Rates were previously 10% and 20% respectively, so this is an unpleasant tax hike for couples who arrange for their taxable gains to be made by the lower income partner.

Disposals

A common misconception is that CGT is only due if an asset is sold, but assets given away to anyone other than a spouse or civil partner are also disposals. Furthermore:

  • With no proceeds coming in if a gift is made, there might be no funds available to pay the related CGT bill.
  • Selling an asset, such as a second property, to a son or daughter at an undervaluation doesn’t avoid CGT. The tax calculation will be based on the asset’s market value.

Similarly, an exchange of assets does not avoid CGT. Again, the market value of each asset will be used when calculating each person’s CGT liability.

When it comes to cryptocurrency, there can be a gain if it is used to pay for goods or services, or if there is a switch in currencies – such as converting Bitcoin into Ethereum.

Some basic planning

Although there is now less scope for CGT planning, there are still opportunities:

  • Make use of your £3,000 exempt amount each tax year, as it cannot be carried forward;
  • Making personal pension contributions in the same year as a disposal may reduce the rate of CGT from 24% to 18%; and
  • Crystalise assets standing at a loss so that the losses can be used to reduce taxable gains (but be careful not to waste the exempt amount).

Spouses and civil partners should plan as a couple, so that two exempt amounts and basic rate bands can be utilised.

HMRC’s guide to CGT (when it is paid, on what, rates and allowances) can be found here.

Capital gains tax receipts

Raising tax rates is a traditional government strategy to increase tax receipts for HMRC, but this may not be the case for capital gains tax (CGT). This is because taxpayers generally have more control over when gains are realised.

The upcoming Budget at the end of October is widely expected to see a hike in CGT rates. However, recently published data from HMRC suggests that the 4% higher rate reduction from 6 April 2024 (28% down to 24%) on residential property disposals may have helped to increase tax receipts as landlords could be taking a good opportunity to sell up.

For the five months to 31 August 2024, CGT receipts increased by nearly 10% compared to the year before.

Take care to plan ahead

Compared to landlords, those with an investment portfolio have more opportunity for CGT planning since they have considerable flexibility over the timing of disposals. However, there is now somewhat less scope for basic CGT planning with the annual exempt amount cut to just £3,000:

  • With an investment portfolio, disposals can be spread over several years to make use of multiple annual exempt amounts and basic rate tax bands. Couples can also make use of the annual exempt amounts and basic rate tax bands of a spouse or civil partner. Such strategies should be used with care, however, as this type of planning will unravel if CGT rates increase in the future.
  • Making personal pension contributions in the same year as a disposal will increase the basic rate tax band.
  • More sophisticated investors might consider investing in a seed enterprise investment scheme. With 50% income tax relief and CGT exemption on 50% of a reinvested gain, a landlord could currently benefit from total tax relief of 64%. This relief will increase in line with any future uplift of CGT rates. These investments are high risk and advice should be taken before engaging in them.

Longer term, those with a large investment portfolio might be able to avoid any tax liability if they retire overseas. This option does not work for landlords because UK property remains subject to CGT regardless of the owner’s residence status.

HMRC’s guide to capital gains tax (what you pay it on, rates and allowances) can be found here.