Are your capital gains causing you a financial headache?

Without a clear strategy, you might end up paying more tax than necessary

Navigating Capital Gains Tax (CGT) can be complicated and daunting, especially with ongoing changes to exemptions, thresholds, and regulations. Understanding the details of CGT is vital, as it directly affects how much tax you owe when disposing of investments such as property, shares, or other valuable assets. Without a clear strategy, you might end up paying more than necessary, leaving less of your hard-earned money in your pocket.

However, with careful planning, informed financial decisions, and an awareness of the available reliefs, you could significantly reduce a CGT liability. Not only does this ensure compliance with tax laws, but it also helps you optimise your long-term financial goals. This article explores practical, actionable strategies to help you lower your CGT liability while safeguarding your wealth.

Understand your annual CGT allowance

Every taxpayer is entitled to an annual CGT exemption, permitting tax-free gains of up to £3,000 for the 2024/25 tax year. This allowance resets each tax year and cannot be carried forward, making it essential to utilise it fully to avoid greater liabilities in the future.

Cuts to the CGT allowance mean that managing this exemption carefully is more crucial than ever. Without proper planning, you could encounter unnecessary tax bills, highlighting the need to optimise your investments according to current limits.

Utilise losses to counterbalance gains

One straightforward strategy for reducing CGT is to offset gains with losses. Gains and losses arising in the same tax year can be offset against each other, reducing the overall amount subject to CGT.

Losses from previous years can also be carried forward and set off against new gains, provided they were reported to HM Revenue & Customs within four years of the tax year in which the asset was sold. By wisely utilising this strategy, you can optimise your tax payments over time.

Maximise exemptions through spousal transfers

Transfers of assets between spouses or registered civil partners who live together are exempt from CGT. By taking advantage of this exemption, couples can effectively double their CGT allowance, enabling each partner to claim their individual limit and thereby reduce taxable gains.

The transfer must be a genuine gift and not conditional. By strategically managing asset ownership, couples can make smarter financial decisions to minimise CGT burdens.

Take advantage of ISA allowances

Individual Savings Accounts (ISAs) are another powerful tool in reducing CGT. Any investments held within an ISA are entirely exempt from CGT. For the 2024/25 tax year, you can invest up to £20,000 in an ISA, or £40,000 for couples using two allowances.

Another helpful approach is the ‘bed and ISA’ strategy. This involves selling an investment to realise a capital gain and then buying it back within an ISA. While this renders future gains CGT-free, it is crucial to consider potential stamp duty costs and the risks associated with being out of the market, even for a short period.

Boost your income tax bands with pension contributions

Pension contributions can not only prepare you for retirement but also help reduce CGT. Contributions effectively extend your basic-rate income tax band, meaning gains may be taxed at 18% rather than 24%.

For instance, a gross pension contribution of £10,000 would raise the higher-rate tax threshold from £50,270 to £60,270 for the 2024/25 tax year. If your capital gains and taxable income fall within this extended basic-rate band, the potential savings could be considerable.

Consider Donating to Charity

Giving land, qualifying shares, or property to a registered charity can offer the dual benefits of income tax relief and CGT exemption. This strategy reduces one’s tax burden while allowing one to contribute to good causes.

Whether you are seeking relief or aligning with your personal values, a charitable donation can play a significant role in your CGT strategy for achieving higher-impact results.

Explore Enterprise Investment Schemes (EIS)

Enterprise Investment Schemes (EIS) provide opportunities for CGT relief, as gains on qualifying investments held for three or more years are exempt from CGT. Additionally, you can defer an existing capital gain by investing it in an EIS within the qualifying timeframes.

However, EIS investments carry higher risks than traditional avenues and can be harder to sell. Professional advice is strongly recommended before considering such schemes.

Investigate ‘Gift Hold Over Relief’

Giving away specific business assets or selling them at a reduced value for the buyer’s benefit may qualify you for Gift Hold Over Relief. This defers the CGT liability, transferring it to the recipient who will only pay CGT when they eventually sell the asset.

Eligibility criteria are strict, and professional advice is a must to ensure compliance and effective planning.

Leverage exemptions for chattels and antiques

Some possessions, including antiques and collectibles, may be exempt from CGT under certain conditions. Non-productive assets, such as antique clocks, vintage cars, or pleasure boats, are exempt, provided they were not eligible for business-use capital allowances.

For non-wasting chattels like paintings or jewellery, gains might also be exempt if the sale proceeds are under £6,000. Understanding these rules can assist you in managing gains on high-value items effectively.

Ready to secure your financial future by making informed and confident decisions?

As CGT is a highly complex subject, obtaining expert advice is crucial for managing your tax liabilities. We can guide you through the options available to you, ensuring you maximise relevant tax reliefs, allowances, and exemptions tailored to your unique circumstances. This planning is an essential component of long-term financial health. If you would like assistance in managing your CGT liabilities or a clearer understanding of your options, please contact a financial adviser today.

THIS ARTICLE DOES NOT CONSTITUTE TAX OR LEGAL ADVICE AND SHOULD NOT BE RELIED UPON AS SUCH. TAX TREATMENT DEPENDS ON THE INDIVIDUAL CIRCUMSTANCES OF EACH CLIENT AND MAY BE SUBJECT TO CHANGE IN THE FUTURE. FOR GUIDANCE, SEEK PROFESSIONAL ADVICE.