Plan now for capital gains tax

Gerry Brown explains why financial advisers and paraplanners need to pay attention to the upcoming changes in Capital Gains Tax.

In his Autumn Statement the Chancellor Jeremy Hunt announced changes to Capital Gains Tax (CGT). The Annual Exempt Amount (AEA) for individuals will be reduced from its current level of £12,300 to £6,000 from 6th April 2023 with a further reduction to £3,000 from 6th April 2024. For most trustees, the AEA will be half that available to individuals.

HMRC has estimated that reducing the AEA for the year 2023-24 could affect around 500,000 individuals and trusts. That number could increase to 570,000 in 2024-25. By 2024-2025 it is estimated that 260,000 individuals and trusts will be brought into the scope of CGT for the first-time.

Clearly, the changes mean that many more people may need financial advice on how best to manage their assets.

Why the government is increasing capital gains tax

The changes are expected to raise over £1.2 billion a year, from April 2025. Legislation implementing the Chancellor’s measures has been included in Autumn Finance Bill 2022.

The government said that this is part of “putting the public finances on a sustainable path in a way that is fair, with everyone contributing a little and those on the highest incomes taking on a larger burden”.

It has also left open the possibility of further rate increases.

What people will pay

The CGT ‘proceeds reporting limit’ will be stay at £50,000. Total disposals, in any tax year, of less than this amount do not have to be reported in the client’s self-assessment. Gains on shares held within ISAs aren’t subject to a CGT charge.

Higher or additional rate taxpayers will pay CGT at a rate of 28% in respect of gains.

Ensuring that gains are realised in 2022-23, rather than 2023-24, will generate a tax saving of £1,764 for an individual with a marginal tax rate of 40% who has sold residential property. (The AEA will fall by £6,300 and applying a rate of 28% gives a ‘saving’ of £1,764.)

This saving will be doubled to £3,528 if the property is owned jointly with a spouse or civil partner.

Ensuring that gains are realised in 2023-24, rather than 2024-25, will generate a tax saving of £840 for an individual with a marginal tax rate of 28% who sells a residential property. (The AEA will fall by £3,000 and applying a rate of 28% gives a ‘saving’ of £840.)

The increases for basic rate taxpayers are less severe. A basic rate taxpayer will ‘save’ £630 on gains (other than on residential property) by disposing of assets in 2022-23 rather than in 2023-24, and £300 by disposing of assets in 2023-24 rather than in 2024-25.

Supplementing a pension will get harder

Of course, tax is only one factor to be considered in deciding whether an asset should be sold or retained. ‘Don’t let the tax tail wag the investment dog’ is an old adage, but one that is still valid.

In particular, some advisers use a strategy of selling shares to supplement pension income in retirement. That involves triggering gains within the AEA and therefore will become much less useful after the proposed reductions in AEA.