Capital Gains Tax (CGT) can significantly impact your profits from selling assets in the UK. But, with the right strategies and knowledge, you can minimise your CGT liability for the 2024/25 tax year.
In this guide, I will help you understand CGT by maximising allowances, offsetting losses, strategic gifting, intelligent investments, charitable donations, and much more. So, stay with me and learn how to avoid capital gains tax.
Let’s Understand Capital Gains Tax (CGT)
The profit you make while selling or getting rid of an item whose value has increased is subject to capital gains tax. Both individuals and corporations are subject to it, and the rates change based on the type of asset involved and your income tax bracket.
In the 2024/25 tax year, basic rate taxpayers will pay 10% on gains within the basic tax band, while higher and additional rate taxpayers will pay 20% on gains above this threshold.
However, some exceptions exist, such as residential property (which attracts rates of 18% and 28%) and carried interest (which has a special 10% rate). Here is the reference for further details.
Maximise Your Annual CGT Allowance
Maximising your annual CGT allowance is one of the most effective ways to minimise your CGT liability.
For the 2024/25 tax year, individuals have an allowance of £12,700, while trusts have an allowance of £6,350. This means you can make profits up to these amounts without paying any CGT.
So, to maximise your allowance, consider planning your asset sales across different tax years and transfer assets to your wife or partner (who has their allowance). Plus, use your total allowance each year.
Offset Losses Against Gains
Another powerful strategy for reducing your CGT liability is to offset any capital losses you’ve gained against your capital gains.
A capital loss happens when you try to sell an asset for less than you paid, including any associated costs.
To claim your losses, you need to report them to HMRC on your tax return within four years of the loss. You can then offset these losses against gains made in the same tax year, which can significantly reduce or even eliminate your CGT bill.
If your losses are greater than your gains, you can indefinitely carry the unused portion to offset future capital gains.
Strategically Gift Your Assets
Gifting assets to your loved ones can be an intelligent way to minimise your CGT liability while you pass on wealth to the next generation. The key is to plan your gifts carefully to take advantage of various tax exemptions and reliefs.
Giving assets to your spouse or civil partner is one of the best tactics because these transfers are free from capital gains tax. This allows you to move assets around without triggering a tax liability, which can be particularly useful if one partner has unused allowances or is in a lower tax bracket.
Also, you can use your annual exemption of £3,000 to give away assets each year without gathering CGT. You can carry forward this allowance for one year if unused.
Some other options include making small gifts of up to £250 per person each year, donating to charities or political parties (exempt from CGT), and considering the potential Inheritance Tax implications when gifting.
Smart Investments: ISAs and Pension Contributions
Investing in Individual Savings Accounts (ISAs) and increasing your pension contributions can effectively minimise your CGT liability.
ISAs are tax-efficient investment vehicles that allow you to grow your money without paying tax on the returns. There are several types of ISAs, each with its advantages, such as Cash ISAs (for tax-free interest), Stocks and Shares ISAs (for tax-free capital gains and dividends), Innovative Finance ISAs (for tax-free peer-to-peer lending interest), and Lifetime ISAs (for saving towards your first home or retirement).
You can utilise your annual ISA allowance (£20,000 for the 2024/25 tax year) and shelter a significant portion of your investments from CGT.
Similarly, you can also increase your pension contributions to minimise your CGT liability. When you eventually withdraw money from your pension, you can typically take 25% as a tax-free amount, with the remainder subject to income tax.
Charitable Donations: A Win-Win for Tax and Society
Making charitable donations will help you minimise your CGT liability. When you donate an asset directly to a registered charity, you won’t have to pay CGT on any gain you’ve made on that asset.
This can be particularly beneficial if you have an asset that has significantly increased in value. Donating allows you to avoid the CGT you would have incurred if you had sold it.
In addition to the CGT relief, you may also be able to claim Income Tax relief on your charitable donations through Gift Aid, which allows the charity to claim an additional 25p for every £1 you donate, and you can claim back the difference between the tax rate you pay and the basic rate on your donation.
To qualify for CGT relief, you must donate an asset, including shares, unit trusts, land, property, and personal possessions worth more than £6,000, directly to the charity.
Spread Gains Over Multiple Tax Years
Another effective strategy to minimise your CGT liability is to Spread your capital gains over multiple taxes. If you carefully time your asset sales, you can take advantage of your annual CGT allowance and potentially pay less tax overall.
The key benefits of this approach include utilising your annual allowance each year, managing your tax bracket to avoid being pushed into a higher rate, and potentially benefiting from future changes in tax rules or allowances.
To implement this strategy, consider selling your assets in stages rather than all at once, delaying sales until the start of a new tax year when you have a fresh allowance, and planning your sales around other income sources to stay within a lower tax bracket.
Tax Relief Schemes and Exemptions
There are quite a few tax relief schemes and exemptions out there that can help you reduce your CGT liability. Two popular options for investing in early-stage companies are the Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS).
With EIS, you get tax relief for investments in small and medium-sized enterprises (SMEs). Investors can get almost 30% income tax relief if they invest up to £1 million per year or even £2 million if it’s a knowledge-intensive company.
SEIS, on the other hand, is aimed at very early-stage companies. It offers even higher tax relief—up to 50% on investments of up to £100,000 per year. Plus, any gains that you receive from both EIS and SEIS investments are exempt from CGT.
Another useful exemption is gift holdover relief. This lets you defer paying CGT on an asset you give away until the recipient sells or disposes of it.
Costs and Expenses That Can Be Deducted
You can deduct certain costs and expenses from the proceeds of your asset sale. These deductions can help to further reduce your CGT liability by lowering the overall gain on which you’ll be taxed.
Allowable costs and expenses basically include those directly related to the acquisition, improvement, and disposal of the asset. Examples of such acquisition costs might include legal fees, surveyor’s fees, or stamp duty paid when purchasing a property.
Improvement costs are applied to enhance the asset’s value, such as renovations or extensions to a property. Disposal costs can include estate agent fees, solicitor’s fees, or advertising costs when selling an asset.
Chattels and Exemptions
When it comes to personal possessions, also known as chattels, specific CGT exemptions can help minimise your tax liability. Chattels are defined as tangible, movable assets, such as antiques, artwork, jewellery, or collectables.
If you are going to sell a chattel for £6,000 or less, you won’t have to pay any CGT on the proceeds. But, if you sell a chattel for more than £6,000, you may be liable for CGT on the gain, although you might qualify for a reduced CGT rate.
You should also note that this exemption applies to individual items, not a set of items sold together. Other types of assets that are exempt from CGT include wasting assets (those with a predictable life of 50 years or less), private motor vehicles, and certain types of coins, medals, and antiques.
Special Considerations for Property Sales
You’re right; it needed a smoother flow. Here’s a more conversational and humanised version:
When you sell a property, there are specific CGT rules and exemptions you need to know about. One of the most helpful is Principal Private Residence Relief (PPR), which can exempt you from paying CGT on selling your main home.
Although there are some exceptions, such as when you had to travel for business, the property had to be your primary residence for the entire period in order for you to be eligible. If you ever rented out a home that used to be your main residence, you might also be able to claim lettings relief, which helps reduce the CGT for the rental period.
It’s also important to keep track of deadlines for reporting property sales to HMRC. Missing them can lead to penalties. Because property CGT rules can get tricky, especially if the property was used in different ways, getting professional advice can really help. Staying on top of these rules and keeping good records will ensure you minimise your CGT and stay in line with HMRC requirements.
When to Seek Professional Help
This guide provides a good foundation for understanding and reducing your CGT liability, but sometimes, it’s better to get professional help. Selling a business, inheriting assets, or dealing with international tax can get complicated. Contact Us for best CGT Services when you find yourself in these situations.
That’s when you might need a tax advisor. They can offer advice that fits your specific situation, helping you make the most of the reliefs and exemptions while keeping everything legal.
These experts can also handle the practical stuff, like calculating your gains, filling out your tax returns, and even talking to HMRC on your behalf.
Yes, hiring a professional costs money, but the savings and peace of mind can be worth it. Whether you need professional advice depends on how complex your tax situation is. But it’s always better to play it safe regarding taxes.
Final Thoughts
Reducing your Capital Gains Tax (CGT) bill requires know-how and smart planning. This guide has covered some key strategies for the 2024/25 tax year. While these tips give you a good base from which to work, don’t hesitate to get professional advice if things get tricky.
Staying informed, using these strategies, and following HMRC rules can help you reduce your CGT and hold onto more of your gains. Just remember, it’s important to tailor these ideas to your own situation and stay on top of your tax planning.
