How to reduce Capital Gains Tax on property and investments
With significant Capital Gains Tax (CGT) changes coming into play in April, it is likely to be more difficult than before to reduce CGT on property and investments.
This means it is more important than ever to structure your finances effectively and to take advantage of the current allowances and exemptions while there is still time.
In this blog post, we will explore the impact upcoming Capital Gains Tax changes will have on investments, property, and gifting, along with discussing how investors may be able to reduce CGT on these transactions throughout the 2023/2024 tax year.
Please note: many of the ideas in this blog post involve an element of investing. As is the nature with investing, your capital is at risk, and you may not receive back the same amount you put in when you choose to cash out your savings. In addition, the ideas set out in this blog post are based on our current understanding of UK legislation, impacting only those within the UK tax system.
What is Capital Gains Tax?
Capital Gains Tax (CGT) in the UK is a tax imposed on the profit made from the sale or disposal of assets, such as property, shares, or fund-based investments, that are sold for more than the original purchase price. The difference between the purchase price and the sale price is deemed to be a gain – on which the tax is due. The rate of tax you pay will depend on your level of earnings and the type of asset you are selling (i.e., property or equities).
CGT is charged at a rate of 10% for non or basic rate taxpayers and 20% for higher or additional rate taxpayers. However, CGT for second homes or buy-to-lets is charged at 18% and 28%, respectively.
There is currently a tax-free allowance per person of £12,300 for gains in the tax year before CGT is payable. However, following the Autumn Statement, this is due to fall to £6,000 per individual on 6th April 2023, and will fall further to £3,000 on 6th April 2024.
What impact will Capital Gains Tax changes have on investments?
As a result of falling allowances, it is more important than ever to ensure that your investments are protected by tax-wrappers such as stocks & shares ISAs and pensions, but most tax-wrappers offer the benefit of sheltering your investments from CGT. For most clients, we recommend utilising your ISA and pension allowance each year as an absolute priority for anyone looking to maximise the return on their investments and reduce the “tax drag” on their returns.
In addition to investments held within tax wrappers, there are certain investments that are exempt from CGT. UK Government Bonds (otherwise known as GILTs) are exempted from CGT. Other specific tax-incentivised investments may also be excluded, such as qualifying Employee Share Schemes and Venture Capital Trusts (VCTs). Please note: these types of investments may carry a higher level of risk, and we recommend speaking to your Adviser to understand whether they will be suitable for your portfolio.
It is important to note that the dividend tax (i.e., the annual exempt amount of income an individual can receive from dividends) will also fall from 6th April 2023, from £2,000 to £1,000 per year. As with the CGT allowance, this will also halve again in April 2024 to £500 per year per person.
The impact of the above changes is summarised in the table below:
|Allowance/threshold amount||Current||April 2023||April 2024|
|Capital Gains Allowance (CGT)||£12,300||£6,000||£3,000|
How can investors reduce CGT on investments in the 2023/2024 tax year?
You can take several steps to try to mitigate the tax impact of the upcoming reductions in the CGT allowance, including:
- Making use of the annual exempt amount you do have.
- Making use of any capital losses from previous years – capital losses need to be recorded via self-assessment tax return or declaration. You normally have four years from the end of the tax year when you want to make the claim to record the losses.
- Considering utilising spousal allowances by transferring assets between you to sell in each name – thereby utilising twice the allowance, as transfers between spouses are tax-free.
- Ensuring you are utilising your tax-wrapper allowances to make the most of future savings on CGT and income tax.
What impact will Capital Gains Tax changes have on property?
There is an exemption for CGT on main residences, so most individuals will not be impacted by these changes on their properties. However, for landlords and those with second homes, these changes will increase the tax bill payable on sale of those properties.
It is also important to note that gifting an asset (i.e., a stock or a property) will be viewed as a disposal for the owner, crystallising the gain and potentially creating a CGT liability. The donee will inherit the asset at the new base cost, which will have been rebased to the date of the gift.
This can lead to a scenario where the asset is liable for CGT because it is considered a gift, while Inheritance Tax (IHT) could also be due over the next seven years. Our blog post on gifting and the potential IHT implications explores this scenario in further detail.
How can investors reduce CGT on property in the 2023/2024 tax year?
Unlike investments into equities or funds, properties are much more difficult to offset the gains on. Most tax-wrappers do not allow for properties to be held within them, with the exception of more bespoke options such as Small Self-Administered Schemes (SSASs), which are a form of pension. However, it is still important to consider the use of brought forward losses and spousal exemptions to mitigate CGT.
How we can help structure your finances to reduce CGT
Capital Gains Tax can create a drag on your investment returns in the region of 20%. By planning strategically to reduce this tax*, you can significantly improve the odds of meeting your financial ambitions and maximise your family’s wealth. Whether you are liable to pay CGT on investments, property, or other assets, our Wealth Planning experts can help you to save, plan, and invest** using the most suitable and tax-efficient methods.
Effective Tax Planning is integral to our Wealth Planning process. This is also why we offer an integrated Wealth Management service across planning and investing, as we believe working with a Wealth or Financial Planner is the most effective way to make your finances go further.
For personalised advice on how to structure your finances in light of the upcoming tax changes, speak to an Adviser.
* Please note, the tax treatment depends on the individual circumstances of each client and may be subject to change in the future.
** As is the nature with all investing, your capital is at risk and you may not receive back the same amount you put in when you choose to cash out your savings.