During Jeremy Hunt’s Autumn Statement on November 17 2022 he announced a series of measures to remedy, as the popular press like to call it, a ‘black hole’ in the UK’s public finances.
Alongside a host of other actions designed to promote stability, stimulate growth and protect public services, the chancellor announced that the capital gains tax annual exemption was to be cut. And then cut again.
With the fiscal ‘black hole’ said to be around £50bn, the chancellor is hoping his programme of reducing the annual exemption will raise £1.5bn for the exchequer over the next five years.
For the tax year 2023-24, the annual exemption amount will be reduced from £12,300 to £6,000 for individuals and personal representatives, and from £6,150 to £3,000 for most trustees.
For the tax year 2024-25 and subsequent tax years, the annual exemption amount will be permanently fixed at £3,000 for individuals and personal representatives, and £1,500 for most trustees.
Legislation will also abolish any future indexation of the annual exemption with CPI and fix the CGT reporting limit at £50,000.
Tax year | Annual exempt amount: Individuals | Annual exempt amount: Trustees |
2022-23 | £12,300 | £6,150 |
2023-24 | £6,000 | £3,000 |
2024-25 and subsequent years | £3,000 | £1,500 |
| Source: Embark | ||
Once considered a tax suffered by the relatively ‘well-off’, the reduction of the annual exemption will expose many more people to CGT. How many?
Well, according to HMRC, when it previously estimated the impacts of reducing the annual exemption by £6,000 it concluded an additional 235,000 people would need to report their capital gains. This clearly demonstrates the impact of the changes.
A higher rate taxpayer who enjoys gains of £22,300 in the next tax year would have to pay £1,260 extra tax compared to this tax year.
This would be compounded by a potential further £600 liability in the following tax year. If the gain relates to the disposal of residential property (taxed at 18 per cent or 28 per cent), the liability to CGT will be higher still.
Higher rate taxpayer, profit from gains of £22,300: | |
Tax year | CGT to pay |
2022-23 | £2,000 |
2023-24 | £3,260 |
2024-25 and subsequent years | £3,860 |
| Source: Embark | |
Now that we know what is coming and when, what can we do to minimise the impact? Here are seven areas to consider:
1. Carry forward losses
Losses in the current tax year are offset against the current year’s gains, however, you can carry forward losses from previous years indefinitely.
It may make sense to utilise these losses in future tax years when the annual exemption has been reduced.
2. Maximise Isa and pension contributions
Sheltering wealth in tax wrappers that are not subject to CGT is always desirable.
When one considers the impact of the reduction in annual exemption in conjunction with the reduction in dividend allowance (from £2,000 this tax year to £1,000 next tax year and £500 thereafter) the benefit of maximising investment in these wrappers is evident.
3. Using your spouse’s/civil partner’s annual exemption
If you’re married, or in a civil partnership, you can utilise your other half’s annual exemption by transferring a gain or loss to them.
HMRC rules allow transfers between spouses/civil partners on a ‘no gain, no loss’ basis, meaning the recipient takes over the asset, the original acquisition cost and the eventual CGT liability upon disposal.
Transferring assets this way can effectively double-up a couple’s exemption allowance and is particularly useful where one partner has an unused exemption.
4. Bed and Isa/pension
Readers will no doubt be familiar with this expression, whereby funds are sold to crystallise a gain (or loss) and then are repurchased in an Isa or pension.
Doing this ensures the funds that are suitable for clients remain in their portfolios and will be exempt from CGT on future growth, while also adjusting the cost base and reducing the rate at which potential CGT liabilities build up outside of the Isa/pension wrappers.
5. Using discretionary trusts
If an individual is averse to being personally liable to CGT they can always pass the tax burden to trustees. Trustees can claim holdover relief on the assets placed into trust and will suffer no immediate CGT liability.
They will, of course, eventually have to settle any CGT due on disposal. Due consideration should also be given to the fact that trustees have half the individual’s annual exemption and pay a flat rate of 20 per cent CGT.
6. Enterprise Investment Schemes
Another option for those wanting to defer CGT would be an EIS investment, which allows the investor to defer tax on the gain within the tax year it would normally be due.
The liability for capital gains from investments in an EIS can be deferred until ultimate disposal.
Investing in this way offers the valuable opportunity to pay a gain at a later date, at a time perhaps more acceptable to the client, reducing the impact on their current financial situation.
7. Multi-asset funds or model portfolio?
Rebalances in model portfolios will crystallise gains/losses, which one could argue works either for or against you.
Multi-asset funds avoid this scenario, however there will be a potential CGT liability on the eventual disposal of the multi-asset fund, which may compound any CGT liability.
The considerations above demonstrate that there is not a one-size-fits-all solution and it is dependent on client circumstances as to whether one option is more beneficial than another.
Neale Smith is technical specialist at Embark Group
