Capital gains tax (CGT) is a tax on the profit you make when you sell or dispose of an asset that has increased in value. Recent rule changes have turned CGT into a significant revenue source for the government, with income from the levy soaring by almost 80% to £24bn in the last tax year – equivalent to over £800 per household.
Who is affected?
A series of changes means more people are being pulled into the CGT net, not just the wealthy. Experts are reminding consumers of legitimate ways to reduce a CGT bill. CGT is levied on profits from various assets, including investments (funds and shares) not held in an Isa, property that is not your main home, and most personal possessions worth £6,000 or more, except your car.
Tax-free allowance slashed
You get a tax-free allowance each tax year, known as the annual exempt amount. This has been cut sharply: until 2022-23 it was £12,300, then reduced to £6,000, and now it is just £3,000. The allowance refreshes each tax year – if you don't use it, you lose it.
Rate increases
CGT rates were increased in the October 2024 budget. Higher-rate taxpayers now pay 24% on their gains. For basic-rate taxpayers, the rate depends on the size of the gain and their taxable income: the lower rate is 18%.
How to reduce your CGT bill
Spousal transfers
You usually don't pay CGT on assets you give to your husband, wife or civil partner. By transferring investments between you, you can use both CGT allowances, potentially allowing annual gains of £6,000 before tax is payable.
Use your Isa allowance
Many experts say it is more important than ever to make full use of your Isa allowance. UK residents aged 18+ can invest up to £20,000 each per tax year, and parents can fund a junior Isa with up to £9,000 per child per tax year – a total of £58,000 for a family of four.
Offset losses against gains
For investments held outside an Isa, selling can trigger a CGT bill. However, investors can offset losses against any taxable gains – either in the current year or in later years, provided they claim through their tax return. Matching gains and losses can cut the overall tax bill.
Gift to children for a Lifetime Isa
If you have adult children planning to buy a home, you may wish to gift funds so they can invest in a Lifetime Isa (available to those aged 18-39).
Reduce taxable income
Capital gains sit on top of your taxable income when calculating the tax rate. Reducing your taxable income can lower your CGT bill. The two main ways are paying into a pension or making charitable donations. For example, if a gain pushes you into the higher-rate band, making a pension contribution for the excess could mean you pay 18% CGT instead of 24%.
Inherited assets
If you inherit an asset, inheritance tax is usually paid by the estate. However, if you later sell or give away that asset, you may owe CGT. Think carefully before deciding to keep inherited assets.
With CGT revenue projected to reach £35bn by 2030-31, understanding these rules and planning accordingly is more important than ever.
