The important exemption to use before the end of the financial year if you’re concerned about Capital Gains Tax increases

When you first start investing, your focus is typically on the level of growth you achieve and the risk you adopt. Yet, you may also consider how you will generate an income from your investments, especially when you retire and no longer have regular earnings from work.

You might purchase shares that pay dividends – a portion of the company’s profits paid to shareholders – to supply a portion of your income. Alternatively, you may decide to sell shares and use the profits, if you make any, to fund your lifestyle.

However, if you’re selling non-ISA investments or other qualifying assets, you may pay Capital Gains Tax (CGT) on your profits. What’s more, your bill could be larger than it previously would have been since the chancellor, Rachel Reeves increased the rate of CGT with immediate effect in the October 2024 Budget.

Fortunately, there is an important exemption – the Annual Exempt Amount – that could help you reduce the CGT you pay.

Read on to learn how this exemption works and why you might want to use it before the end of the tax year.

You can make profits of up to £3,000 in 2024/25 without paying Capital Gains Tax

CGT is a tax on the profits or “gains” you make when selling certain qualifying assets. This includes:

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

You can make gains up to your Annual Exempt Amount without paying CGT. In 2024/25, this stands at £3,000 and resets at the end of each tax year.

Any profits that exceed the Annual Exempt Amount will be taxed at:

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

This means, for example, that if you bought some shares outside an ISA for £10,000 and later sold them for £20,000, you’d make a profit of £10,000. After the Annual Exempt Amount of £3,000 is applied, you would then pay tax on the remaining £7,000.

This means a:

Basic-rate taxpayer would pay £1,260
Higher- or additional-rate taxpayer would pay £1,680.

You could potentially mitigate CGT by holding your investments in a tax wrapper such as an ISA. However, if you’ve already used your ISA allowance (£20,000 in 2024/25) and want to continue investing in a General Investment Account (GIA), you may need to explore other ways to reduce CGT.

Considering how and when you use your Annual Exempt Amount could help you achieve this.

Splitting a sale across several tax years might help you reduce Capital Gains Tax

If you need to generate some cash in the next year or so to help fund your lifestyle or pay for a large one-off expense, you might consider selling some assets.

Using the same example as above, if you make £10,000 profit and apply the Annual Exempt Amount, you pay CGT on the remaining £7,000.

However, if you were to sell half the shares this tax year, and the rest the following year, you would make a gain of £5,000 each year. In each year, you would have the full £3,000 Annual Exempt Amount to use, meaning you pay CGT on the remaining £2,000 (assuming you made no other gains in those years).

This means a:

Basic-rate taxpayer would pay £360 each year for a total of £720
Higher- or additional-rate taxpayer would pay £480 each year for a total of £960.

As you can see, spreading the sale across several years could mean that you pay less CGT overall. So, if you plan to sell some shares in the future and still have some of your Annual Exempt Amount left, you might consider using it before the end of the tax year on 5 April 2025.

Passing assets to a spouse or civil partner to sell could mean you benefit from both Annual Exempt Amounts

Everybody has their own Annual Exempt Amount, and you may be able to use this to your advantage if you’re married or in a civil partnership.

This is because you can pass assets to your spouse or civil partner without paying CGT. If they then dispose of the asset, CGT is calculated based on the difference between the value when you purchased it, and the value when they sell it.

However, they have their own Annual Exempt Amount to use, meaning you can make gains of up to £6,000 between you before paying CGT.

Consequently, if you share assets with a spouse or civil partner, and then split the sale across several tax years, you could significantly reduce the CGT you pay.

For instance, using our previous example, if you sold the shares yourself, you would make £10,000 profit. Yet, if you transferred half to a spouse or civil partner and then both sold them, you’d make £5,000 profit each.

You could also both split the sale across two tax years. As a result, you’d each make £2,500 profit a year. Provided you haven’t made any other gains in those years, you would both be within your Annual Exempt Amount, so wouldn’t pay any CGT at all.

Bear in mind that this kind of tax planning can be complex, so you may want to seek professional advice first to ensure you don’t accidentally trigger a tax charge.

You may be able to offset losses against your capital gains to reduce your tax bill

If you sell multiple assets in the same year, you might make profits from some, while making losses on others. You can offset these losses against your gains to reduce your CGT bill.

For example, you might make £5,000 profit from selling some shares but lose £2,000 when selling a painting. If you offset the losses, this brings your total taxable gains down to £3,000, meaning you pay no CGT, as long as you made no other gains in that tax year.

Additionally, you can bring forward unused losses from previous years, provided you report the loss to HMRC within four years of the end of the tax year in which you made the sale. However, losses from the current year must be used first before bringing forward losses from previous years.

You may want to check whether you have any unused losses from the past four years before the end of the tax year. We can help you find ways to offset losses and potentially reduce your CGT bill.

Get in touch

If you’re concerned about the recent increase in the rate of CGT, we can help you reduce your bill.

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.

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.