Capital gains tax (CGT) is a levy on the profit made when selling or disposing of an asset that has increased in value. Recent rule changes have turned it into a significant revenue source for the government, with income soaring by almost 80% to £24bn in the last tax year—over £800 per household. More people, not just the wealthy, are now being pulled into the CGT net, prompting experts to remind consumers of legitimate ways to reduce their tax bills.
What Is Capital Gains Tax?
CGT applies to profits from various assets, including investments (funds and shares) held outside an Isa, property that is not your main home, and most personal possessions worth £6,000 or more, excluding your car. The tax-free allowance, known as the annual exempt amount, has been slashed in recent years: from £12,300 in 2022-23 to £6,000, and now to £3,000. This allowance refreshes each tax year—if unused, it is lost.
Current Rates and Changes
CGT rates were increased in the October 2024 budget. Higher-rate taxpayers now pay 24% on gains. For basic-rate taxpayers, the rate depends on the gain size and taxable income: the lower rate is 18%. The Office for Budget Responsibility predicts CGT revenue will rise to £35bn by 2030-31. Former health secretary Wes Streeting has also proposed equalising CGT with income tax, which could mean higher bills for many.
How to Reduce Your CGT Bill
There are several legitimate strategies to lower your CGT liability:
Transfer Assets to a Spouse or Civil Partner
You usually do not pay CGT on assets given to your husband, wife, or civil partner. By transferring investments between you, both allowances can be used, allowing annual gains of £6,000 before tax may be payable.
Maximise Isa Allowances
UK residents aged 18 and over can invest up to £20,000 per tax year in an Isa. Parents can also fund a junior Isa with up to £9,000 per child per year. This totals £58,000 for a family of four, shielding investments from CGT.
Offset Losses Against Gains
If you sell investments outside an Isa, you can offset losses against taxable gains in the same year or future years, provided you claim through your tax return. Matching gains and losses can cut the overall tax bill.
Gift Funds for a Lifetime Isa
If you have adult children planning to buy a home, you may gift funds for a Lifetime Isa (available to those aged 18-39). This can help them save with tax advantages.
Reduce Taxable Income
Capital gains sit on top of your taxable income when determining the tax rate. Reducing your income—by making pension contributions or charitable donations—can lower your CGT rate. For example, if a gain pushes you into the higher-rate band, a pension contribution for the excess could mean paying 18% CGT instead of 24%.
Inherited Assets
When you inherit an asset, inheritance tax is usually paid by the estate. However, if you later sell or give it away, CGT may be due. Consider carefully whether to keep inherited assets.
These strategies can help you manage your CGT liability in light of the tightened rules.
