How a potential change in Capital Gains Tax could affect your clients

The Labour Party won the general election on 4 July 2024 with a landslide, promising a manifesto of change. Since the party took power, chancellor Rachel Reeves has said that Labour inherited a dire economic situation and warned that there would be “difficult choices” about tax in the future.

However, she confirmed the party’s earlier promise not to raise Income Tax, National Insurance (NI), or VAT to avoid increasing the tax burden on “working people”.

That said, despite ruling out increases to these specific taxes, the chancellor has hinted there will be tax rises in the future to balance the books and pay for the government’s ambitious plans for the country. One she has been notably quiet about is Capital Gains Tax (CGT).

Read on to learn how potential changes to CGT might affect your clients, and how we could help them mitigate a tax bill.

Your clients may pay Capital Gains Tax when selling or transferring ownership of their assets

As the name suggests, CGT is a tax on the gains your clients make when selling or transferring ownership of a qualifying asset. The tax is calculated based on the profits they make, rather than the full value of the sale.

Qualifying assets that potentially attract CGT include:

Stocks and shares held outside of an ISA
A property that isn’t a main home
Certain business assets
Most personal possessions worth more than £6,000, excluding a car.

If your client sells any of these assets or transfers ownership by passing them on to another person, and they make a profit, they may be liable for CGT.

However, before tax is due, they can make gains up to their “Annual Exempt Amount” which stands at £3,000 in the 2024/25 tax year.

Your clients may have to pay CGT on any gains that exceed the Annual Exempt Amount, and the rate they pay depends on their Income Tax bracket. They could pay:

10% if they’re a basic-rate taxpayer (18% for a residential property that isn’t their main home)
20% if they’re a higher- or additional-rate taxpayer (24% for a residential property that isn’t their main home).

For example, if they purchase a painting for £20,000 and later sell it for £40,000, they’d make a profit of £20,000. The first £3,000 – their Annual Exempt Amount – is tax-free, and they may then have to pay CGT on the remaining £17,000.

As a higher- or additional-rate taxpayer, this would land your client with a £3,400 tax bill.

It’s worth noting that the previous government reduced the Annual Exempt Amount from £12,300 to £6,000 in April 2023, and then again to £3,000 the following year. As a result, your clients may already be more likely to pay CGT than they would have been in the past.

Now, there are concerns that Labour could make further changes to CGT.

Labour could reduce the Annual Exempt Amount or increase the rate of CGT

We can’t be sure whether Labour will change CGT in the future, but it is a possibility as the government seeks to raise extra revenue to fund its plans.

There are multiple ways the government could do this. For example, they could further reduce the Annual Exempt Amount, or remove it altogether. This would mean that your clients are more likely to pay CGT in the first place.

For instance, using the earlier example, if they made profits of £20,000 and didn’t have an Annual Exempt Amount at all, they may pay tax on the full amount. This means a higher- or additional-rate taxpayer could pay £4,000 – an extra £600.

Alternatively, Labour could increase the rate at which your clients pay CGT and bring it in line with Income Tax.

Based on the previous example, this would mean a higher-rate taxpayer pays £6,800 in CGT and an additional-rate taxpayer pays £7,650. This assumes the Annual Exempt Amount remains in place.

Fortunately, we can help your clients prepare for this eventuality.

Using an ISA may help your clients reduce the CGT they pay

We can help your clients mitigate CGT now and in the future in several ways, including giving them guidance about tax wrappers.

For example, investments they hold in a Stocks and Shares ISA are free from CGT and don’t attract Income Tax or Dividend Tax. In the 2024/25 tax year, your clients can contribute up to £20,000 across all their ISAs.

We can help them understand ISAs if they haven’t used one before, and take full advantage of their allowance, so they can reduce the CGT they pay.

Forward planning could allow your clients to be strategic with their Annual Exempt Amount

Another way we can support your clients is by demonstrating how to use their Annual Exempt Amount strategically.

For example, if your client purchased some stocks and shares outside of an ISA for £10,000 and later sold them for £15,000, they’d make gains of £5,000. After applying the Annual Exempt Amount, they may be liable for CGT on the remaining £2,000.

However, if they were to evenly split the sale across two tax years, they’d only make gains of £2,500 each year. As a result, they wouldn’t exceed their Annual Exempt Amount and pay CGT.

Alternatively, your clients could pass assets to their spouse or civil partner to sell on their behalf. CGT may still be payable, and this is calculated based on the value of the asset when the client purchased it and the value when their partner sells it.

However, they can benefit from using both Annual Exempt Amounts and potentially reduce the CGT they pay.

We can advise your clients on the most efficient ways to use their Annual Exempt Amount.

Get in touch

If your clients are concerned about upcoming changes to CGT, we can help them mitigate a large bill.

They can contact us at hello@ardentuk.com or call or WhatsApp on 01904 655 330. As an award-winning financial advice company with advisers included in the 2024 VouchedFor Top Rated Guide, you can be sure that we’re a bona fide company providing excellent advice and high-quality service.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The Financial Conduct Authority does not regulate tax planning.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.