The chancellor increased Capital Gains Tax in the Budget. Here’s 4 ways to reduce your bill

You might have read our previous article about the potential “double tax” on pensions because of upcoming Inheritance Tax (IHT) changes. In it, we discussed the announcement Rachel Reeves made about IHT and pensions, but this wasn’t the only tax change that could affect you. The chancellor also increased Capital Gains Tax (CGT) with immediate effect.

Consequently, you could pay more tax than you previously would have done when selling (or “disposing of”) certain assets.

Read on to learn more about CGT changes and four ways to potentially reduce your bill.

You could pay Capital Gains Tax when selling certain qualifying assets

CGT is a levy on profits you make when selling or transferring ownership of certain qualifying assets. This may include:

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

Fortunately, you can make gains of up to £3,000 in 2024/25 without paying CGT. This is your “Annual Exempt Amount”. Any profits that exceed this threshold will be subject to CGT and the rate is dependent on your marginal rate of Income Tax.

You could pay:

18% if you’re a basic-rate taxpayer
24% if you’re a higher- or additional-rate taxpayer.

It’s important to note that these rates increased after the Budget, so you could pay more than you would have before 30 October 2024.

The rate of Capital Gains Tax increased with immediate effect after the Budget

An increase to CGT rates was one of the key announcements in the Budget, and it took effect immediately.

If you purchase shares for £10,000 and later sell them for £20,000, you will make a profit of £10,000. After applying the Annual Exempt Amount, you will pay CGT on the remaining £7,000.

As a higher- or additional-rate taxpayer, this will leave you with a bill of £1,680 – £280 more than you would have paid before the CGT rates increased.

As such, you may want to consider how much CGT you’ll pay when selling or transferring ownership of assets. Fortunately, there are ways to potentially reduce your bill.

4 ways to mitigate a Capital Gains Tax bill

1. Use your ISA allowance

Investing through a Stocks and Shares ISA could be an effective way to mitigate a large tax bill in the future. This is because you don’t pay CGT or Dividend Tax on any returns from investments in an ISA. You won’t pay Income Tax when withdrawing wealth from your account either.

In 2024/25, you can contribute up to £20,000 across all your ISAs. Your partner has their own ISA allowance too, so you could invest up to £40,000 tax-efficiently between you.

Making use of as much of this allowance as possible is one of the simplest ways to reduce the CGT you pay.

2. Consider the timing of disposals to make the most of your Annual Exempt Amount

If you’re selling assets held outside an ISA, you may pay CGT on any gains that exceed your Annual Exempt Amount. You may want to consider how you use this allowance.

For example, if you purchase shares for £5,000 and later sell them for £10,000, you’d make gains of £5,000. After applying the Annual Exempt Amount, you would pay CGT on the remaining £2,000.

However, if you split the sale across two tax years, you would only make a profit of £2,500 in each year. Provided you didn’t make any other gains in that year, you would remain within your Annual Exempt Amount and wouldn’t pay CGT.

3. Plan with your spouse or civil partner

Joint planning with a spouse or civil partner could also help you manage your tax liability because you can normally pass assets to them without triggering a CGT charge.

If they then sell the assets, they may be subject to CGT. Any tax payable is calculated based on the price you paid for the assets and the amount your spouse or civil partner eventually sells them for.

Despite this, you could still benefit as they have their own Annual Exempt Amount. Using our previous example, you could split £5,000 of shares between you and your partner and each sell half, instead of selling them all yourself.

Consequently, you would both make profits of just £2,500, meaning you’re both within your Annual Exempt Amount and don’t pay CGT (provided you make no other gains that year).

Even where you must pay some tax despite splitting the sale, it’s worth noting that one person might pay CGT at a lower rate than the other. As such, it could be worth transferring assets to this person to sell.

4. Consider increasing your pension contributions

If you’re concerned about the CGT you might pay, increasing your pension contributions could benefit you in several ways:

You don’t pay CGT or Dividend Tax on any returns generated from investments in your pension. As such, your pension could be a useful tax-efficient way to invest.
You may benefit from employer contributions and tax relief on top of your own payments. This means that a contribution to your pension could be “worth” more than wealth you pay into an ISA.
Increasing your pension contributions could reduce your taxable income and, in some cases, could mean you move into a lower tax bracket. Consequently, you might pay CGT at a reduced rate.

If you’ve used your ISA allowance for the year and want to continue investing, your pension could be a suitable option.

That said, it’s important to consider when you need to access the funds. Generally, you can’t draw from your pensions until the normal minimum pension age (NMPA) of 55 – rising to 57 from 2028 onwards. In comparison, you can access wealth in an ISA from any age.

As such, when deciding where to invest, it’s important to consider your goals and when you are likely to withdraw your wealth.

Get in touch

If you want to explore ways to mitigate CGT in the future, we can help.

Please contact us at hello@ardentuk.com or call or WhatsApp us 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.

All information is correct at the time of writing and is subject to change in the future.

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.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.

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.