With the Capital Gains Tax annual exempt amount set to reduce, is it time to crystallise some gains?

In 2020/21, Capital Gains Tax (CGT) brought in £14.3 billion for the exchequer, realised on £80 billion of gains and affecting 323,000 taxpayers.

The total CGT liability increased sharply in the most recent figures – indeed, the amount of gains and number of taxpayers increased by 19% and 20% respectively.

Back in 2020, the Office of Tax Simplification published a report in which they recommended the government should “consider more closely aligning CGT rates with Income Tax rates”.

While the recommendations were not implemented at the time, the tax has remained a focus for successive chancellors. The latest, Jeremy Hunt, finally announced some reforms to CGT in his 2022 autumn statement.

So, with changes to CGT in the pipeline, now is a good time to focus on how you can utilise the valuable annual exempt amount on capital gains.

More about your annual CGT allowance

When looking at maximising your tax allowances, the CGT annual exempt amount is one that often flies under the radar.

This exemption lets you make a certain amount of gain each year before you must pay tax. Nearly everyone who is liable for CGT benefits from the allowance, including trusts.

In 2022/23, the annual exempt amount stands at £12,300. However, in the autumn statement, the chancellor announced that the exemption would reduce to £6,000 in the 2023/24 tax year, and just £3,000 in the 2024/25 tax year.

It’s important to remember you only pay CGT on gains. CGT is a tax on the profit when you sell (or dispose of) an asset that has increased in value. It is the gain you make that’s taxed, not the amount of money you receive.

Most commonly, these assets refer to:

Second homes

Shares, bonds, funds (including exchange-traded funds), and business assets not held in an ISA
Commercially dealt antiques, rather than personal possessions, gifts, or private cars.

Of course, gains are ultimately what investing is all about. However, as an investor, Capital Gains Tax is like the giant boulder chasing Indiana Jones in Raiders of the Lost Ark – you can only run for so long before you need a plan and a strategy. This is especially the case in light of the chancellor’s decision to cut this valuable exemption.

An example

Charlotte has a portfolio worth £2,500,000. After one year of investment the portfolio has risen 10%, giving a gain of £250,000. If Charlotte was to encash the entire portfolio at this point, she would have to pay tax on the £250,000 gain.

In the 2022/23 tax year, the CGT annual exempt amount is £12,300, so the actual taxable gain would be £237,700.

Charlotte would then pay £47,540 in CGT (£237,700 x 20%) but has not paid the first £2,460 (£12,300 x 20%) as this is covered by the exemption.

If this were to happen in the 2023/24 tax year when the annual exempt amount reduces to £6,000, Charlotte would pay £48,000 in CGT (£244,000 x 20%). She has not paid the first £1,200 (£6,000 x 20%) as this is covered by the exemption.

Why you should consider crystallising gains

As an investor, your CGT annual exemption is very much an annual “use it or lose it”. You can’t carry it forward to future years.

Ideally, you should ensure that the full exemption – £12,300 in 2022/23 – is “harvested” from your total gains in any given year. If it isn’t, you could just be kicking a tax can down the road.

You have to accept that CGT must be paid at some point in the future. If some of that tax comes sooner rather than later, then so be it. It’s essentially an argument between emotions and maths.

  • If you crystallise gains now, use your annual exemption, and pay CGT at 20% you have less in the account post-reinvestment.
  • Or, you could have a larger amount invested but you’ll be pregnant with CGT and have to pay it in the future.

We have undertaken research that revealed that, unless investors are holding to death, the numbers suggest individuals should consider crystallising gains now if they are able to do so, use their annual exemption, and take the hit.

In addition, the compound effect of using an annual CGT allowance is significant, and so the allowance should be utilised in dealing accounts, where available, each year.

There is certainly a case for realising gains while the tax rate is 20% and while the annual exempt amount stands at £12,300. Of course, everyone’s circumstances are different and so we recommend speaking to us before making any decisions in this regard.

The annual exempt amount change will likely increase the CGT you pay

In 2022/23, the annual exemption allows chargeable gains of up to £12,300 each year. As you have read, it is an effective way of limiting the tax payable on an investment portfolio by ensuring you realise sufficient gains each year to make the most of the exemption.

It is currently worth up to £2,460 a year for a higher-rate taxpayer. And, if you repeat this exercise each tax year, the tax savings can have a significant impact on your net investment return.

From 2023/24 the exemption will only be worth £1,200 for a higher-rate taxpayer, and from 2024/25 just £600.

It’s worth remembering that the exemption is for an individual. So, planning carefully with your spouse or partner before 5 April 2023, could see you realise £24,600 of gains before you pay any CGT.

Could CGT rates rise in the future?

In their 2020 report, the Office of Tax Simplification suggests CGT rates are “more closely” aligned with Income Tax rates.

While this has yet to happen – Jeremy Hunt elected to reduce the exemption rather than change the tax rates – it is something that a future government could revisit.

Currently, the full gain you make (with no adjustment for inflation) is added to your income to determine the rate of tax that will apply. This is currently 10% and 20% on non-residential assets and, 18% and 28% on residential property.

If the government aligns CGT and Income Tax rates as part of a package of reforms, you could pay 40% or even 45% tax on gains. It’s worth noting here that people who pay CGT are twice as likely to be higher-rate taxpayers than those who do not.

It’s yet another reason to consider realising gains now. The worst-case scenario currently is that you’ll pay 20% CGT on investment gains whereas, in the future, this could be 40% or more.

Speak to us

If you have a potential CGT liability, there are strategies we can employ to mitigate this. For example, maximising your ISA investments, or planning more closely as a couple so you can use both individual exemptions can reduce your CGT bill.

Please email or contact us on 020 7400 4700.

Please note

This article is for information 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.

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