How to lower your capital gains tax bill

With the government cracking down on capital gains tax, we look at how you can lower your tax bill by splitting your allowance.

HMRC tax
(Image credit: Getty Images)

Capital gains tax is paid on the profits earned on the sale of an asset, such as shares or property

And the government has been gradually increasing the tax collected in this way by reducing the tax-free allowance on gains. 

The tax allowance on capital gains was reduced from £12,300 to £6,000 in April and is set to be cut again to £3,000 from the next tax year in April 2024.

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This could see more investors paying capital gains tax (CGT) when selling assets.

 “Government estimates show that thanks to the cuts over the next two years around a quarter of a million more people will have to pay the tax,” says Laura Suter, head of personal finance at AJ Bell.

“It also means that anyone who already paid the tax will pay a higher bill – as more of their gains will be taxed. However, there are lots of ways to organise your affairs to reduce this tax bill.”

There are ways to reduce your CGT bill though, especially if you are married or in a civil partnership.

Splitting assets with your husband, wife or civil partner means you can effectively double your allowance and boost how much profit you can take tax-free when selling shares or an additional property. 

Here is what to consider.

What is capital gains tax? 

CGT is a tax paid on any gains or profit made when selling an investment asset such as shares held outside an ISA tax wrapper or an additional property.

Capital gains tax does not apply to primary residences so you won’t have to pay any tax when you sell your main home, although second homes, buy-to-let properties and holiday lets will attract CGT.  

The CGT bill depends on your tax band.

Basic rate taxpayers will owe 18% on any gains when selling an additional residential property or 10% on other assets. 

If you pay the higher or additional rate of income tax and you’re selling residential property, you’ll pay 28% CGT.

This drops to 20% on other investments.

There is an exemption for a certain amount of profit before the tax is owed.

This was £12,300 up to the current tax year and is now £6,000 and will halve to £3,000 from 2024/2025.

How splitting your assets reduces your CGT bill 

HMRC provides some generous allowances to married couples or civil partners when it comes to owning assets jointly.

If you own an asset such as a buy-to-let property jointly with another person, the allowances of both parties can be combined. 

This becomes more important with reducing allowances, says Rachael Griffin, tax and financial planning expert at Quilter.

“It effectively allows for a doubling of the profit threshold before CGT comes into play. In real terms, for the tax year 2023-24, this translates to a combined profit of £12,000 without being liable for CGT.”

There are downsides to this approach though.

“Both have to agree in terms of management and also in say a divorce 50% of the asset now actually belongs to the other party,” adds Griffin.

“It is therefore not a decision to be made lightly.”

Assets can also be freely transferred between spouses or civil partners without incurring CGT. 

This is useful if one partner is in a lower tax band or where one individual has losses that can be used to offset any gains above the annual capital gains tax allowance.

“The limitation is that any transfer has to be in a tax year in which the couple have at some point lived together, although they do not have to be living together at the time of the transfer,” adds Jason Coppard, financial planning manager at Lumin Wealth

It is important to seek advice so you understand the implications of sharing or transferring assets, says Griffin. 

“If such an asset, which was previously transferred, is later put up for sale, the CGT due will be calculated based on the gain made during the entire duration it was owned by the couple, not just from the time it was transferred.”

This also only applies to married couples or civil partners.

You will still have your own allowances if unmarried but there may still be CGT to pay if you transfer assets above the exempt amount if you just living together, even in a long-term relationship. 

Alternative ways to reduce your CGT bill 

There is an alternative approach for a transfer of assets between spouses that is less widely used, adds Coppard.  This is for charitable or philanthropic giving.

if a couple wishes to donate to charity, it is less tax-efficient for the gift to be made by a lower-rate taxpayer.

“Transferring the asset to the individual in the higher tax band before gifting, via Gift Aid, can be worth 20% on the higher rate or 25% in additional rate tax relief. This is because tax bands are extended by the gross charitable donation, thereby increasing the segment of income that’s taxed at the lower rates.

“This is even more valuable for individuals with income between £100,000 and £125,140, as it will also restore some – or all – of their tax-free personal allowance of £12,570.”

You don’t have to be married or in a civil partnership to make use of other CGT exemptions though.

Victoria Rutland, chartered financial planner at EQ Investors, said contributing to a pension may move you into a lower tax bracket which means you pay a lower level of CGT.

You could also invest money into an Enterprise Investment Scheme (EIS), which can reduce or delay your CGT liability.

 Another way to limit your CGT bill is by not selling all your assets at once, adds Niki Patel, tax and trust specialist for St James’s Place.

“If you stagger the sale of say shares over several tax years, then you can make the most of several years’ CGT exemption,” says Patel.

“For example, you could sell part of a share portfolio on 3 April and the rest on 6 April to take advantage of two years’ CGT exemption.”

You can also offset any losses you’ve made on other assets. 

 “While no investor wants to make a loss, losses can be your friend for capital gains tax purposes,” adds Suter.

“Losses made in the current tax year can be offset against any gains you make this year, before you deduct your annual tax-free allowance. If you don’t use your losses this year you can carry forward any losses for future tax years, to offset against future gains. Just make sure you register the losses with HMRC within four years after the end of the tax year in which you made the sale in question.”

Another option is to do a ‘Bed and ISA’, says Suter.

This is where you sell assets up to your CGT limit for the year and then buy them back within an ISA, which means you’ll protect any future gains from the taxman.

“You’ll need to check how much ISA allowance you have remaining this tax year to make sure you don’t go over the £20,000 annual limit,” she says

“You can use your platform’s Bed and ISA service to do this and they will take care of the selling and buying for you, usually for one fee.”

Marc Shoffman

Marc Shoffman is an award-winning freelance journalist specialising in business, personal finance and property. His work has appeared in print and online publications ranging from FT Business to The Times, Mail on Sunday and The i newspaper. He also co-presents the In For A Penny financial planning podcast.