An introduction to Capital Gains Tax

In our recent blog posts we have been highlighting the importance of utilising tax efficient vehicles such as ISAs and pensions. You may remember that we wrote about the change to capital gains tax allowances which makes ensuring your investments are tax efficient is as important as ever. In this blog we will be explaining the evolving landscape of Capital Gains Tax (CGT).  

What is CGT? 

CGT is a tax on the profit when you sell an asset that has increased in value. This includes personal possessions over £6,000 (such as jewellery), properties (excluding your main home under certain conditions), business assets, and investments such as shares and funds that are not held in a tax efficient structure.  

The annual exemption amount, which is the amount of gain you can realise without becoming liable to tax, is set for a significant decrease. From £6,000 in the 2023/24 tax year, it will drop to £3,000 in April 2024. It's important to use this exemption wisely as it's a 'use it or lose it' benefit. 

The amount of tax paid beyond this annual exempt amount is based on the owner’s marginal rate and may go across different tax bands, depending on other income sources, but in simple terms this would be 10% for a basic rate payer and 20% tax for a higher rate tax payer. The tax owed would be included in your self-assessment tax return. 

It is possible to offset losses against gains to reduce the overall CGT liability, and any crystallised losses can be carried forward indefinitely.  

Property 

Your main residence is generally exempt from capital gains tax (there are conditions attached to this). However, if you own another residential property that is not your main home, the rates of CGT on disposal are 18% in the basic rate tax band and 28% in the higher rate tax band. The tax liability may be quite significant in this case, and it is therefore important to plan as early as possible to try to mitigate any unnecessary tax. CGT on the sale of a residential property would need to be paid within 60 days of the completion date.  

Investments 

Shares in companies or investment trusts, or units in investment funds can usually be held within tax efficient wrappers such as pensions and ISAs. To reiterate our previous blogs, this highlights the importance of having these structures in place, as no CGT would apply, even if the investments experienced significant growth. Assets that are not currently held in these wrappers can be gradually moved over to them, using the annual CGT allowance where available, through a ‘Bed & ISA’ or ‘Bed & Pension’ process. 

Married Couples and CGT 

Transfers between spouses are considered at "no gain, no loss". This means that planning asset transfers between spouses can maximise the use of annual exemptions for both partners. This can be particularly effective where the partners are in different tax rate bands. 

 On divorce, the CGT rules are more complex. The rules changed for divorcing couples in April 2023 and are much better than before, but assets will still be transferred pregnant with gains, so that's important for divorcing couples to keep in mind. For more help in this area, please contact info@smartdivorce.co.uk. 

Business Asset Disposal Relief 

This relief, applicable to certain business disposals, offers a reduced CGT rate of 10%; You may be able to pay a reduced rate of 10% on gains on qualifying assets when you sell all or part of your business. There is a lifetime limit on the amount an individual can claim under BADR which is now £1,000,000. It is vital for business owners to understand and apply these rules correctly and consider their personal planning alongside the business. At Smart Financial we can help you navigate the prospect of exiting your business. We can help you navigate the transition from both a financial and lifestyle point of view. 

With CGT undergoing significant changes, it's more important than ever to stay informed and consider professional financial advice. Whether you're an investor or business owner, understanding CGT can significantly impact your financial decisions, and as ever, early planning helps ensure you are on the right path. 

For more information and personalised advice, feel free to contact Smart Financial. We're here to guide you through these changes with expert advice tailored to your unique situation. Please contact contactus@smartfinancial.co.uk.