Amid changes to the system of Capital Gains Tax, it is crucial to understand the ways to invest your money without being hamstrung by a large bill from HMRC. Making the most of your own hard-earned cash has to be a priority point for all investors and businesses alike, while also remaining within the legal and ethical framework of proper taxation.
Alterations to Capital Gains Tax allowance was one of the government’s flagship economic policies in the Chancellor’s October 2024 Budget, reducing the allowance rate for individuals to earn before their gains become taxable, as well as increasing the percentage of both basic and higher rate taxpayers contribute.
But what are these changes and what do they mean for investors? We explore the nuances of Capital Gains Tax allowance and the new rates of payable tax below.
What is the Capital Gains Tax allowance?
Capital Gains Tax allowance is the amount of profit you can make from an asset before any tax becomes payable if you were to sell it. Over the last few years, the allowance rate for individuals has drastically decreased, falling from £12,300 in 2022/23 to just £3,000 for 2024/25, and the rates paid are simultaneously going up.
Rates for Capital Gains Tax were changed last year, with rates for basic rate taxpayers all having risen to 18%, and rates for higher rate taxpayers increased to 24%, putting all rates in line with the corresponding rates for residential property. The amount of Capital Gains Tax you pay depends not just on your tax band, but also your total allowance for that specific year.
Typical investments that can be subject to Capital Gains Tax are second properties or buy-to-let housing, the sale of a business, or valued possessions in general, such as jewellery, vehicles or antiques. You will also be required to pay Capital Gains Tax on shares that are not ISAs or pensions, overseas assets and exchange-traded funds.
How to calculate your Capital Gains Tax bill
Although Capital Gains Tax rates have increased, it will be a little easier going forward to work out your bill than it was previously, with gains on all assets now having the same rates, as of 30th October 2024.
The first step is to work out your capital gain – so, starting with the sale price or disposable value, you deduct the purchase price or acquisition cost and any other allowable costs such as fees and investments you made into the asset. This will give you your chargeable gain.
Then, you need to deduct your tax-free allowance of £3,000 for individuals or, in the case of most trusts, £1,500. This will give you the taxable gain.
Lastly, you need to apply the correct rate of Capital Gains Tax of 18% or 24% to your taxable gain based on your tax band to work out the total sum of Capital Gains Tax you’ll owe.
Of course, this year, there is the added complication that gains from earlier in the tax year will be subject to different rates of Capital Gains Tax. For disposals made before between April and October 2024, you’ll need to apply the old rates for different types of assets. So non-property had a rate of 10% for lower rate payers and 20% for higher rate payers, so you’ll need to separate any gains made earlier in the year and calculate them separately.
Ways to reduce your Capital Gains Tax bill
Due to the increase in rates having been introduced with immediate effect following last year’s Budget, investors were unable to plan in advance for the changes to thresholds and rates.
Despite this, there are still ways for you to protect your earnings from the increases. Your options include moving existing investments into more tax-efficient ventures — such as a stocks and shares ISA or a personal pension — or perhaps transferring the ownership of some investments to a spouse or civil partner. This is an especially effective method when the spouse in question pays a lower rate of income tax than you do.
Alternatively, you can stick to making the most of your £3,000 capital gains allowance by realising a big gain gradually over a number of years, rather than claiming the gain in one singular transaction. So long as you stay within that £3,000 allowance each year, you won’t pay Capital Gains Tax.
How we can help
Fully grasping and understanding the rules and regulations around Capital Gains Tax and the allowance you have can be difficult and complex, but here at Matthew Douglas, we are ready to help you. Our team of qualified financial advisors are on hand to guide you through the process, and advise you on ways to reduce your overall Capital Gains Tax liability, such as offering cashflow modelling to mitigate the amount you have to pay.
Get in touch with our team and book a complimentary meeting with one of our fully qualified advisers.