New Year, New Taxes:
How to Navigate New Capital Gains Rules
Benjamin Franklin famously said ‘Nothing is certain except death and taxes.’ Tax is a part of life, and this year most of us are all going to be paying more of it. Britain has entered a high tax era and it is important for financial advisors to be clear with their clients that there is only so much they can do to mitigate these new taxes.
On 17 November last year the chancellor Jeremy Hunt delivered his Autumn statement. This saw an increased focus on taxing ‘unearned income’ as opposed to ‘earned income’.
What you need to know
Today we’ll look at one announcement in particular: the slashing of the tax-free allowance for capital gains by over 75% over the next two tax years.
The chancellor announced that the Capital Gains Tax (CGT) Annual Exempt Amount (AEA) would be reduced from 6 April 2023 to £6,000 per individual, with a further reduction pencilled in from 6 April 2024 to £3,000 per individual.
You will still get some tax-free allowance for gains each tax year, but anything above the revised AEA amount and you’ll need to pay CGT.
Some people are going to be paying more tax no matter what they do. If you are retired, a higher rate taxpayer and single then that is probably you. Others have more options at their disposal.
For some, this will mean action is required to complete a tax return. According to HMRC, nearly 260,000 individuals and trusts will be dragged into the scope of CGT for the very first time in the next tax year. And because CGT is self-reported you won’t get a bill through your letterbox. Instead you are going to have to report it yourself.
Some people are going to be paying more tax no matter what they do. If you are retired, a higher rate taxpayer and single then that is probably you. Others have more options at their disposal. Indeed, there are more than FiveWays of reducing your potential tax bill.
What options do I have?
#1
Make the Most of the Annual Exemption (AEA)
The AEA will reduce to £6,000 on 6 April 2023 and go down again to £3,000 from 6 April 2024. However, for the remainder of this Tax year ending on 5 April 2023, the AEA will remain at £12,300. The saying ‘use it or lose it’ is applicable here as you cannot carry the annual CGT allowance into subsequent tax years. If you have a large potential gain you should consider making the most of the current AEA before being dragged into paying more taxes. But don’t hang about: there are just a couple of months left to take full advantage of the currently sizeable allowance.
#2
Make the Most Use of Tax Efficient Wrappers
You can leave the money where it is and accept a bigger tax bill. Or you can move the money to another tax wrapper, such as an investment fund or bond, although both are potentially liable to income tax.
Another option would be to look at using tax efficient wrappers such as ISAs and pensions, neither of which are necessarily wholly tax free; however they are highly tax efficient in terms of shielding you from CGT. No matter the size, any gains you make on investments held in an ISA are sheltered from CGT. Outside of investment bonds and ISAs, there are no comparable alternatives that are as tax efficient.
#3
Offset Your Losses
Before you deduct your tax free allowance (AEA) remember that you can offset any losses made in the current tax year against gains. If the current year losses exceed your gains, you can also carry forward the difference - just remember to include it in your tax return. Losses from previous years can also be carried forward indefinitely, as long as you don’t use the AEA first to create a loss.
#4
Use Pension Contributions
Any gains over the yearly exemption are charged at 10% or 20% (higher rates apply to Property gains). However, this depends on your income-tax bracket. By making a pension contribution you can potentially extend your basic rate tax band, reducing the amount of CGT you will pay for the year.
#5
Transfer Assets to a Spouse or Civil Partner
Every individual has their own CGT allowance. Therefore if your spouse or partner has not used theirs, or if they are in a lower tax bracket, transferring assets to a spouse or civil partner could be an attractive option for those seeking to bring down their CGT bill.
#6
Make a Charitable Donation
The season of goodwill may be over, but you can still make a charitable donation – and perhaps pay less CGT as a result. If eligible you can claim gift aid on the donation in addition.
Are you unsure about any of the tax changes?
Feel free to contact one of our specialist advisors to talk things through if you are unsure about any of the tax changes coming this year or whether you need to complete a tax return.