The annual Capital Gains Tax (CGT) allowance is now £3,000, down from £12,300 in 2022/23.
CGT rates also increased in October 2024. For most chargeable assets, the lower rate increased from 10% to 18%, while the higher rate rose from 20% to 24%.
Paying less CGT — and in some cases potentially paying no CGT — may be possible, but it usually requires proactive planning. Clients should not leave CGT planning until the point of sale.
How to reduce a client’s CGT bill
1) Use the CGT allowance
Each individual has a £3,000 tax-free CGT allowance. This refreshes each tax year and cannot be carried forward. If a client does not use it, they lose it.
Capital losses incurred in the same tax year can be offset against gains above the annual allowance. Losses carried forward from previous tax years may also be used to reduce taxable gains, provided they have been properly reported.
For married couples and civil partners, it may be possible to transfer investments between spouses or civil partners before sale, allowing both allowances to be used. This could mean up to £6,000 of gains before CGT may be payable.
For larger disposals, transferring assets to a spouse or civil partner who pays tax at a lower rate may also reduce the overall CGT bill. Professional advice should be taken before making transfers, particularly where timing, ownership, or anti-avoidance rules could be relevant.
2) Use the ISA allowance
Investments held within an ISA are free from CGT and income tax. For clients with investments held outside an ISA, a “Bed and ISA” can be a useful way to move assets into a tax-efficient wrapper.
This usually involves selling investments and buying them back inside an ISA. As a result, CGT may arise if the realised gain exceeds the client’s annual CGT allowance.
This process can be repeated each tax year, gradually moving investments into an ISA. Clients may wish to prioritise income-producing investments, as this can help reduce both CGT and dividend tax exposure over time.
3) Use pension contributions strategically
Like ISAs, investments held within a pension do not attract CGT or dividend tax. Pension contributions can also reduce adjusted net income, which may help clients remain below key income tax thresholds.
This matters for CGT because moving into a higher income tax band can increase the rate of CGT from 18% to 24%.
With income tax thresholds frozen until 2031, fiscal drag is likely to pull more people into higher tax bands over the coming years. Clients may find themselves on the wrong side of a threshold because of a pay rise, promotion, or increase in other income.
Pension contributions may therefore help clients maintain a lower tax position, preserve access to valuable allowances, and improve long-term retirement savings.
Advisers should also remember that these planning points may apply to their own finances. CGT planning is most effective when considered before a disposal is made.
Tax rules can change, and the benefits of planning depend on individual circumstances. Clients should take appropriate professional advice before acting.
With thanks to Business & Accountancy Daily and Clare Stinton of Hargreaves Lansdown.
