11th July 2024
general
The first reduction in the 2023/24 tax year took the annual exempt amount (AEA) down to £6000 for individuals and £3000 for most trustees. This has been further reduced in 2024/25 to £3000 for individuals and £1,500 for most trustees. It will remain fixed permanently at these levels for future years.
Let’s look at how the changes could affect your financial position and explore ways to mitigate their impact.
But first, a quick recap on some of the rules around CGT.
What is Capital Gains Tax?
You pay CGT on the profit you make when selling or disposing of an asset that has increased in value. It’s important to note you only pay the tax on the gain, not the whole amount of money you receive.
So, if all your gains in any one year are under your tax-free allowance you don’t need to pay any CGT.
However, you can’t carry forward any unused allowances from one year to the next - it’s a case of ‘use it’ or ‘lose it’.
And remember, ‘disposing’ of an asset is not just selling it. It can also include giving it away as a gift, transferring it to someone else, swapping it for something else and getting compensation for something.
What assets do you pay CGT on?
You need to pay CGT on the following items, known as ‘chargeable assets’:
But you don’t pay it on any gains from:
You must report by 31 December in the tax year after you made your gain and pay by 31 January. For example, if you made a gain in the 2024 to 2025 tax year, you need to report it by 31 December 2025 and pay by 31 January 2026.
CGT rates
The rate of CGT you pay depends on your total taxable income for the tax year. As of 2024/25, the CGT rates for higher or additional rate taxpayers are 24% on gains from residential property and 20% on other assets.
And if you’re a basic rate taxpayer, CGT on any gains falling within the basic rate Income Tax band is 18% for residential property and 10% on other assets.
Private Residence Relief (PRR) continues to apply on disposals of main residences, but you may be liable for CGT on other residential property gains such as buy-to-let properties, business premises, land or inherited property.
Who does it apply to?
Any individual, trustee or personal representative who has realised a gain is liable for CGT. What you pay will depend on your overall gains above your allowances.
The AEA is separate from your Personal Allowance (£12,750) which is your tax-free allowance for income, salary or rental income.
What about if you’re married?
If you’re married, have a partner or own assets with another person, you can combine your exemptions. This means, between you, you could have double the amount of tax-free gains.
You also do not pay CGT on any assets you give to your husband, wife or civil partner. But, the exemption doesn’t count if you’ve separated and did not live together in that tax year.
Plus, it does have to be a genuine gift. You can’t have given them goods to their business to sell on.
Also be aware that if your spouse or civil partner later disposes of the asset, they may have to pay tax on any gain. This is why it’s important to keep careful records as their gain will be calculated on the difference in value between when you first owned the asset and when they disposed of it.
How can you mitigate the impact of the changes?
The 2024/25 reduction to the CGT allowance to £3000 for individuals (£1500 for trustees) means proactive tax planning is more critical than ever. Consider the following steps:
Keeping records
Maintain a detailed record of what you paid for an asset, the original purchase cost, additional expenses, legal fees and the selling price. This enables you to follow a clear trail if you need to calculate the exact gain later.
Next steps
Navigating CGT can be complex, especially with the recent changes in the allowances. It’s worth seeking professional advice to make sure you’re taking full advantage of the reliefs and exemptions available.
Please don’t hesitate to contact a member of the team if you’d like to find out more about proactive tax planning.
