The Capital Gains Tax (CGT) annual exempt amount falls
Further to the November 2022 budget, from 6 April 2023, the Capital Gains Tax (CGT) annual exempt amount falls to £6,000, before falling again to £3,000 on 6 April 2024. In this article, we look at the financial implications of these cuts as well as some ideas to potentially mitigate their effects. This is useful reading for CII R02, R03, R06, AF1, AF4, and AF5 exam revision.
This article is relevant to examinable tax year 2023/24 and is correct as at 18 January 2023.
CGT Annual Exempt Amount
Prior to 6 April 2023, the CGT annual exempt amount allowed chargeable gains of up to £12,300 each year to be taken free of tax. This had the effect of taking many individuals with relatively small gains out of the requirement to report or pay tax on them.
It was also an effective way of limiting the gains payable on an investment portfolio by ensuring sufficient gains were realised each tax year to use the exempt amount, potentially saving up to £2,460 a year.
In the past, the annual exempt amount was inflation-linked, typically rising a few hundred pounds each tax year. However, it remained at £12,300 from 2020/21 and, from 6 April 2023, it falls to £6,000 for individuals and legal personal representatives (up to £3,000 for most trusts). From 6 April 2024, there will be a further reduction for individuals and personal representatives to £3,000 (up to £1,500 for most trusts). There will be no inflation-linked increases to these figures in future.
In addition, the proceeds reporting limit for CGT has changed from being in excess of four times the annual exempt amount to a fixed figure of £50,000
Impact of Changes to the CGT Annual Exempt Amount on Net Gains
Let’s take a look at the financial impact of both recent and upcoming changes on a capital gain of £20,000 for a higher-rate taxpayer:
| Gain | |||
| Annual Exempt Amount | |||
| Tax Due | |||
| Net Gain |
The table illustrates a significant drop in the net gain over time:
- In 2022/23, the net gain represented just over 92% of the gross gain.
- By 2024/25, it will be down to 83%, with over twice as much CGT being payable than in 2022/23.
Strategies to Reduce the Impact of the Reduction in the Annual Exempt Amount
Maximising use of the 2022/23 annual exempt amount may well be a priority for most people.
Thereafter, there may be scope to reduce the impact of the cuts by maximising ISA and pension contributions. Growth on funds held within these tax wrappers is not subject to CGT and does not count towards the annual exempt amount.
For couples who are married/in a civil partnership, where one party is using their full annual exempt amount but the other isn’t, consideration could be given to transferring or sharing ownership of existing investments to enable the other party to use their annual exempt amount too. This could also save CGT where the receiving party is, say, a basic-rate taxpayer and their partner normally pays tax at the higher rate. To be effective for tax purposes, any transfer must be made outright, and it must be unconditional.
Over the longer term, a Bed and ISA transaction can be considered as a means of moving existing direct shares or collective shareholdings into a tax-sheltered environment.
Once these vehicles are maximised, investors could select high-yielding funds to minimise growth or could consider an investment bond.
Grab the resources you need!
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