The chancellor hiked capital gains tax (CGT) rates in the Autumn Budget, meaning you could now face a higher bill when you sell or give away assets.
The lower rate of CGT was raised from 10% to 18%, and the higher rate from 20% to 24%, bringing the main rates in line with those charged on the sale of second homes.
Our MoneyWeek guide explains how capital gains tax works but, in this piece, we delve into further detail about how you can cut your bill.
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Simple steps like offsetting any losses, timing your gain carefully, or carrying out a ‘Bed & ISA’ transaction could save you thousands of pounds when you file your annual tax return.
1. Consider your tax position next year
Investors often have a choice as to when they take a capital gain, so it’s worth considering your overall tax position.
Not everyone’s income is consistent from year to year. You might be a freelance worker, for example, who decides to take on more work one year than another.
If you expect to earn less income next year and be in a lower tax band, deferring the sale of an asset could mean you pay a lower rate of CGT on the gain, explains Sarah Coles, head of personal finance at Hargreaves Lansdown.
“Conversely, it may be beneficial to take your profits in this tax year if you expect to pay more tax in the future,” she adds.
Of course, you also need to weigh up other factors like market timing. If you are looking to sell some shares after a good run because the outlook has suddenly turned sour, delaying the sale for tax reasons might not make sense if it comes with the risk of capital losses.
2. Use your annual allowance
Each year, you can take a certain amount in capital gains before any tax is due. This is known as your CGT allowance or your annual exempt amount. The annual allowance works on a ‘use it or lose it’ basis.
Unfortunately, the CGT allowance has been slashed in recent years from £12,300 to £6,000 in April 2023, and again to £3,000 in April 2024.
If you are building up a large gain, it could make sense to realise it gradually over a period of years. By taking £3,000 in profits each year, you could avoid paying any tax at all. You can reinvest the money once you have sold your investment, effectively re-setting your gains to zero.
3. Offset any losses
You may have losses on some investments and gains on others in any given year. You can use this to your advantage by offsetting the two.
For example, if you have £10,000 in gains and £3,000 in losses, you only need to pay tax on £7,000 of gains. If you haven’t yet used your annual exempt amount (£3,000), you can bring this into the equation too, taking your taxable gain down to £4,000.
“It is worth considering strategically timing the sale of assets to maximise the use of losses against gains in the most tax-efficient manner,” says Myron Jobson, senior personal finance analyst at Interactive Investor.
4. Deduct any unused losses from previous tax years
If you don’t use your losses this year, you can carry them forward for use in future tax years.
“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,” warns Charlene Young, pensions and savings expert at AJ Bell.
You register a loss by including it on your tax return.
5. Use a stocks and shares ISA
You can avoid CGT entirely by holding your investments in an individual savings account (ISA). You can pay up to £20,000 into your ISA (or ISAs) each tax year in total. Any capital gains you make on assets held in an ISA account are tax-free, no matter the size of the gain.
No income tax is due on investments held in an ISA either, so you can use it to keep your dividends safe from the taxman too.
6. Carry out a ‘Bed & ISA’ transaction
A ‘Bed & ISA’ transaction involves selling your existing assets and rebuying them within an ISA. If you do this gradually only realising gains of £3,000 per year (equivalent to your annual CGT allowance), you won’t have to pay any CGT in the process.
Once your assets are held within the ISA, you can wave goodbye to income and capital gains tax completely as far as the investments in question are concerned.
Investment platforms often offer this service where they take care of the selling and buying for you, usually for one fee.
A recent case study from Vanguard highlighted the savings you could make over a decade using Bed & ISA transfers – potentially thousands of pounds.
7. Pay into a pension
Putting money into your pension is one of the most tax-efficient ways to save for the future. Any income or gains earned within a pension wrapper is tax-free.
Furthermore, savers receive pension tax relief on any contributions, paid at their marginal rate. This is 20% for basic-rate taxpayers, 40% for higher-rate taxpayers and 45% for additional-rate taxpayers. The 20% is applied automatically, but you may need to claim the rest via your tax return if you are a higher or additional-rate taxpayer.
“The triad of investment growth, pension tax relief and the magic of compounding can significantly grow your retirement nest egg over the long term,” Jobson explains.
Pensions used to be a tax-efficient way of passing on wealth after death too, as private pension pots fell outside of the inheritance tax net. Unfortunately, this is changing from April 2027 after an announcement made in the Autumn Budget.
8. Don’t forget Sharesave schemes
Workplace share schemes can be incredibly valuable, but they may come with a capital gains tax sting. Fortunately, there’s an ISA rule that helps you save CGT on shares from a Sharesave scheme or Share Incentive Plan (SIP).
“As long as you transfer the shares into an ISA within 90 days of the scheme maturing, and they are valued at less than your annual ISA allowance of £20,000, there won’t be any CGT to pay on these shares,” Coles explains.
9. Plan as a couple
If you’re married or in a civil partnership, you can transfer the ownership of some assets to your spouse. There’s no CGT to pay on the transfer.
“This means that if your spouse hasn’t used up their tax-free allowance this year and has some ISA allowance remaining you can make use of those tax breaks,” Young explains. “You just need to make sure you keep a note of the original cost of the asset, as that’s what will be used when your partner comes to sell it.”
This can result in even greater savings if your spouse is a basic-rate taxpayer and you are a higher or additional-rate taxpayer, as tax will be charged at a lower rate.
10. Consider CGT-free investments
Finally, you could consider adding some CGT-free investments to your portfolio. They include gilts and things like venture capital trusts.
VCTs are risky, so should only be considered as a small part of a large and diverse portfolio – but they are tax-efficient. In addition to the CGT and dividend tax saving, you can get up to 30% income tax relief on the amount you invest.
