How to maximise tax-efficient capital gains in 2024
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How do you protect your capital gains from needless tax? This question has become more pressing to UK investors since April 2024, when the Government lowered the tax-free capital gain tax (CGT) allowance from £6,000 to £3,000 per year. In light of this change, what options are available to keep more of your hard-earned returns?
Below, our Grantham financial planners identify some of the main options for tax-efficient investing in 2024-25. Please note that there is a general election planned for 4 July, and a new government could change some of the rules discussed here. As such, if you are concerned about how your tax bill may be affected, consider seeking professional advice.
We hope these insights are helpful. To discuss your own family financial plan with us, please get in touch to arrange a no-obligation financial consultation at our expense:
01476 855 585
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Use your ISA
In 2024-25, a UK resident can contribute up to £20,000 to their ISAs in a given tax year. Any interest, capital gains or dividends earned within these “wrappers” will be tax-free.
The Stocks & Shares ISA, for instance, can be a great option for those looking to build a portfolio of shares, bonds and other price-appreciating investments which are not taxed when they are later sold at a profit.
These benefits are likely to make ISAs even more attractive to investors in 2024, given the reduced CGT allowance mentioned above (down to £3,000 per year). However, be mindful of the various “opportunity costs” involved with maximising your ISA.
For instance, the Cash ISA can be a useful wrapper for tax-efficient savings. This is because interest is automatically free from Income Tax. However, if you assign a large portion of your £20,000 ISA allowance to cash, this leaves less available for tax-efficient investing (e.g. in a Stocks & Shares ISA).
It can help to speak with a financial adviser to ensure you are using your ISAs optimally. The best approach will vary depending on your unique financial goals and situation. For instance, a young person looking to get onto the housing ladder may benefit more by focusing contributions on a Lifetime ISA. An older worker considering early retirement may wish to concentrate on a Stocks & Shares ISA.
Please note that a “British ISA” is being introduced. This is planned to “extend” an individual’s normal £20,000 ISA allowance by £5,000 per year, provided the owner invests in British shares. See our latest article here for more information about what we know so far about the British ISA.
Use your partner
If you are married or in a civil partnership in 2024-25, you have additional options for mitigating CGT. In particular, asset transfers between partners are tax-free. For instance, if you own £10,000 in shares within a general investment account (GIA) and give/sell them to your spouse, there is typically no CGT to pay.
This rule can help some households save on their overall CGT bill. Suppose a husband has used his £3,000 CGT-free allowance already in 2024-25 after selling some shares for profit. His wife has not used any of her Annual Exempt Amount. The husband gives some of his remaining shares to his wife, who then sells them for a profit (up to £3,000). In this case, they collectively shield £6,000 from CGT.
Use your pension
Are you investing for retirement? If so, your pension will almost certainly play a powerful role in building a tax-efficient nest egg. Not only are your capital gains free from tax within a pension, but your returns are (in effect) “amplified” by the tax relief on your contributions.
For instance, a Basic Rate taxpayer only needs to contribute 80p to put £1 into their pension due to the 20% “boost” from the government. For a Higher Rate taxpayer, the “cost” is even less (40p).
Pensions also typically have a wider “contribution window” compared to ISAs. Whilst the latter restricts someone to £20,000 per year, the former offers an annual allowance of £60,000 per year (or up to 100% of your earnings – whichever is lower).
One drawback of pensions is that they are more restrictive than ISAs regarding access to benefits. Typically, your workplace or private pension will not allow you to take benefits before you reach your Normal Minimum Pension Age (NMPA).
In 2024-25, the NMPA is set at 55 (although this is expected to increase to age 57 from 2028). By contrast, funds in a Cash ISA or Stocks & Shares ISA can be accessed at any time. This feature of ISAs can make them useful when planning for early retirement (e.g. retiring before age 55). However, the NMPA restriction on pensions can help investors avoid the temptation to access funds prematurely before they have grown sufficiently.
Invitation
There are other ways to save on a CGT bill. For example, giving an asset to a registered UK charity prevents any tax on its value appreciation. However, the three ideas listed in this article are likely to feature as predominant options for most investors in 2024.
We hope this content has ignited some ideas to explore with a professional. If you are interested in discussing your own financial plan or investment strategy with us, please get in touch to arrange a no-commitment financial consultation at our expense:
01476 855 585
info@casfin.co.uk
