Reducing Your Capital Gains Tax Bill: A Comprehensive Guide

Capital Gains Tax (CGT) is a crucial component of the UK tax landscape, affecting those who profit from the sale of assets such as property, shares, or valuable possessions. However, there are numerous legal methods to reduce your CGT bill. In the October 2024 UK Budget, Chancellor Rachel Reeves announced immediate increases to Capital Gains Tax (CGT) rates. The lower rate for basic-rate taxpayers rose from 10% to 18%, and the higher rate for higher-rate taxpayers increased from 20% to 24%. These adjustments apply to disposals made on or after 30 October 2024. In this article, we'll explore a range of tactics, including long-life assets, chattels, cars, spread betting, ISAs, and UK government gilts, to help keep your tax liability to a minimum.

1. Take Advantage of the Annual Exemption Allowance

The UK government offers an annual exemption for CGT, which allows individuals to earn a certain amount of profit each tax year without paying any CGT. As of the 2024/25 tax year, the allowance is £6,000. If your gains are below this threshold, they will be free from CGT. Married couples or civil partners can double their exemption by ensuring each partner makes use of their own allowance. However, this is set to decrease to £3,000 in the 2025/26 tax year so it might be a good idea to realise gains before April if you haven't used the allowance this year.

2. Spread Ownership Between Spouses or Civil Partners

Transferring assets to your spouse or civil partner is another effective strategy. Transfers between spouses or civil partners are exempt from CGT, allowing you to take advantage of both partners' CGT exemptions and potentially split the tax liability, especially if the recipient partner is in a lower tax band. For example, if one partner has used up their CGT exemption but the other has not, transferring an asset to the partner with remaining allowance can help utilize their exemption. This approach is particularly beneficial if the receiving partner pays tax at a lower rate, thereby reducing the overall CGT bill.

3. What about Chattels

In the UK, chattels—tangible movable property like furniture or jewelry—are subject to specific Capital Gains Tax (CGT) rules. Chattels with a predictable useful life not exceeding 50 years are called wasting assets and gains from the disposal of such assets are generally exempt from CGT, unless they were used in a business, and capital allowances were or could have been claimed.

Chattels with a predictable useful life exceeding 50 years are called non-wasting assets and are generally subject to CGT upon disposal. However, certain exemptions and reliefs can reduce or eliminate the CGT liability on these assets.

• Exemption for Chattels Disposed of for £6,000 or Less: if you sell a chattel for £6,000 or less, the gain is exempt from CGT. This exemption applies regardless of the asset's useful life.
• Marginal Relief for Chattels Sold Between £6,000 and £15,000: for chattels sold for more than £6,000 but not exceeding £15,000, a special relief limits the chargeable gain. The gain is restricted to five-thirds of the amount by which the disposal proceeds exceed £6,000. This calculation ensures that the CGT liability is moderated for disposals within this range.

4. Dispose of Cars and Other Personal Vehicles

Cars are generally exempt from CGT, regardless of their value or the profit made upon sale. This exemption applies even to classic or luxury vehicles that may have appreciated considerably in value. The same rule applies to motorcycles and vans, provided they are intended for personal use rather than business purposes.

5. Use ISAs to Shelter Gains

Individual Savings Accounts (ISAs) are among the most efficient tools for minimizing CGT. Investments held within an ISA are entirely free from CGT, regardless of how much they grow. This makes ISAs an excellent vehicle for shielding investments, such as stocks and shares, from future CGT liabilities. Other more specialised containers such as EIS funds or VCTs are also free of CGT.

6. Consider UK Government Gilts and NS&I Products

Investments in UK government gilts (bonds) and National Savings and Investments (NS&I) products are also free from CGT. This makes them an attractive option for investors looking to diversify their portfolios without incurring CGT on potential gains. These low-risk investments can provide steady returns while avoiding a potential tax hit.

7. Spread Betting: A Tax-Free Investment Option

Spread betting is a popular form of financial trading in the UK that does not attract CGT. Unlike traditional investing, spread betting is treated as gambling and thus benefits from tax exemptions. While it carries higher risk due to the potential for losses, the tax-free status makes it appealing for investors who are comfortable with the risks. Because you can bet on almost anything, including financial products on platforms such as City Index or CMC Markets, spread betting is actually a smart alternative to using a brokerage account. But you have to have some serious discipline as it's possible to put positions on with very small deposits and if you do that you will end up being liquidated when the markets move.

8. Offset Gains with Losses

Capital losses can be used to offset gains, thereby reducing your CGT liability. For instance, if you sell an asset at a loss, you can use that loss to reduce the taxable gains on another asset sold within the same tax year. Any unused losses can be carried forward indefinitely to offset future gains, provided you register the loss with HMRC.

9. Time Your Disposals Wisely

Timing your disposals strategically can also help reduce your CGT bill. Selling assets over multiple tax years allows you to take advantage of the annual exemption more than once. For instance, if you have significant gains to realise, consider spreading the sales across different tax years to maximise the use of the annual allowance.

10. Gift Assets to Charity

If you are inclined towards philanthropy, gifting assets to a registered charity can provide both CGT and Income Tax relief. Any gains on such gifted assets are exempt from CGT, making this an effective strategy for those wishing to support charitable causes while reducing their tax liability.

Conclusion

Reducing your Capital Gains Tax bill is achievable through careful planning and the strategic use of available exemptions and reliefs. Whether it’s through the use of ISAs, spreading ownership between partners, investing in tax-exempt assets like UK gilts, or even taking advantage of exemptions for chattels and cars, there are numerous legitimate ways to reduce the amount of tax you need to pay. Don't hesitate to reach out if you have any specific question for us.