How to navigate capital gains tax
Capital gains tax (CGT) has come under the spotlight again. The 2024 Autumn Statement confirmed an increase in the rates for non-property asset disposals. Moreover, we have witnessed a repeated fall in the tax-free CGT allowance over the past two tax years.
In this guide, our Grantham financial advisers explain how capital gains tax works in 2024-25. We include some thoughts on how to navigate it confidently after the Autumn Statement’s changes, helping investors keep more of their hard-earned returns.
What is Capital Gains Tax?
Capital gains tax (CGT) only applies upon the sale of a “chargeable asset”. For instance, if you sell shares in a general investment account (GIA), the realised profit may be subject to CGT.
Similarly, if you sell an additional property – e.g. a Buy to Let – that has appreciated in value since your original purchase, this asset is also likely to incur a CGT charge. Your main home is excluded from CGT, provided you meet certain conditions.
This has two important implications. Firstly, CGT is not automatically levied on an asset which rises in value. It only comes into play when you sell it. For example, if shares rise in your GIA, capital gains tax will not apply if you keep hold of them.
Secondly, only specific assets (i.e. “chargeable” assets) fall under the scope of CGT. Certain assets can be exempted from CGT even if you sell them at a profit – e.g. those realised within an ISA or pension “wrapper”. We cover these in more detail shortly.
How much is CGT?
There are two main “categories” of capital gains tax:
- Property-related CGT. This applies to assets which are classed as “residential property”, such as a Buy to Let. The basic rate is 18%, and the higher rate is 24% (unchanged by the Autumn Statement).
- Non-property CGT. This applies to other chargeable assets, such as the disposal of shares and bonds. The basic rate is 18% after the 2024 Autumn Statement, with the higher rate now standing at 24%.
In effect, the Autumn Statement has equalised the CGT rates for property and non-property asset disposals.
If you are a self-employed sole trader or in a business partnership, you pay CGT on selling assets that have risen in value since the original purchase.
However, you may be able to reduce your CGT bill by using business asset disposal relief (previously called entrepreneurs’ relief).
Limited companies may be required to pay corporation tax on the disposal of company assets. Shareholders can qualify for business asset disposal relief in certain circumstances (e.g. if you control at least 5% of the company’s net assets of which you are selling).
CGT allowances
As mentioned, not all asset disposals are subject to CGT.
For instance, suppose you sell an asset for less than the original purchase price in 2024-25. This loss can be offset against gains from other asset disposals in the same tax year.
Losses must be offset against the current year’s gains first, but if they exceed this, then any excess can be carried forward to use against future gains, potentially indefinitely. Capital losses must be reported to HMRC within four years from the end of the tax year in which they arise.
Assets within an ISA (individual savings account) do not incur a CGT charge when sold for a profit. The same applies to asset disposals inside a pension.
Every UK tax resident is entitled to a yearly CGT-free allowance called the Annual Exempt Amount. In 2024-25, this allowance stands at £3,000.
Certain shares can also qualify for special CGT rules, such as those which qualify for the Enterprise Investment Scheme (EIS).
How do I navigate CGT effectively?
There is no denying that CGT has become harder to mitigate in 2024. Not only have CGT risen since the 2024 Autumn Statement, but the Annual Exempt Amount has gradually fallen in the past two tax years, from £12,300 in 2021-22 to £3,000 today.
Notwithstanding, there are still many routes available to investors who want to make their portfolios tax-efficient. A simple starting point is the ISA.
In 2024-25, you can contribute up to £20,000 per year to your ISAs. For instance, all of this could be committed to a Stocks & Shares ISA, with any investment returns free from CGT.
Contributing to a pension is also a highly efficient way to invest over the long term. Scheme members are constrained mainly by the Annual Allowance, which stands at a maximum of £60,000 (or 100% of your earnings for the tax year – whichever is lower). From April 2027, pensions are also set to be liable to UK Inheritance Tax, pending a consultation period.
If you are married or in a civil partnership, you can gift or sell assets to your spouse or civil partner without incurring CGT charges. With some careful structuring, this can open up opportunities to maximise your joint tax position.
For instance, suppose you have fully used your Annual Exempt Amount for 2024-25, but your spouse has not. If you both want to dispose of more shares you own, you might consider transferring these to your spouse, who can then sell them tax-free, using their own Annual Exempt Amount.
Another option is to spread out your asset disposals across multiple tax years, if your gains will take you over your Annual Exempt Amount and you can afford to wait.
If you’d like to make sure you’re taking the right steps to safeguard your financial future, please get in touch.
