17 January 2023
In his November 2022 autumn statement, chancellor Jeremy Hunt laid out a series of tax break squeezes that will potentially increase the amount of tax paid on some forms of unearned income.
In the statement, Hunt announced that the Capital Gains Tax (CGT) annual exempt amount and Dividend Allowance will both be reduced significantly in April 2023, and then again in April 2024. He also froze the Inheritance Tax (IHT) nil-rate bands for a further two years, fixing them at their current rates until 2028.
In the 2022/23 tax year, the CGT annual exempt amount, meaning the amount you can earn in profits from some asset sales before CGT is due, stands at £12,300.
However, as of April 2023, the annual exempt amount will reduce to £6,000. In April 2024, the amount will decrease again to just £3,000. Money Marketing reports that these squeezes will mean 260,000 earners pay CGT for the first time.
If you have financial targets that include making capital gains in the coming years, you could pay additional CGT on these earnings compared to the 2022/23 tax year.
These goals could include selling:
- Non-ISA shares
- Your second home or other investment properties
- Most other assets worth more than £6,000.
CGT is charged as follows:
- Basic-rate taxpayers pay CGT at a rate of 10%, or 18% for residential property.
- Higher- and additional-rate taxpayers pay CGT at a rate of 20%, or 28% for residential property.
Luckily, there are strategies you can employ to help reduce the amount of CGT you could pay when the allowance shrinks.
Here are three of the ways you can anticipate these changes and work to reduce their effects.
1. Maximise your ISA investments
If you plan to grow your investments or sell off a portion of your assets in the coming few years, ISAs could be a great tax-efficient wrapper to use.
Profits you earn from a Stocks and Shares ISA are not subject to Income Tax nor CGT, meaning you can freely invest in ISA shares and pursue growth without fear of an increased tax bill.
By focusing on nurturing your ISA wealth over the coming years, you could make significant capital gains without increasing your tax burden. If you are paying increased CGT in other unavoidable areas, your ISA gains could help even out the impact on your finances.
Although past performance is not a reliable indicator of future performance and returns are never guaranteed, putting your ISA investments in a favourable position for growth could be helpful in the coming years.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
2. Make the most of your losses
While we often focus on capital gains, it could be pertinent at this time to focus on capital losses, too.
Indeed, we often see losses as purely negative instances, but in actual fact, your losses could help mitigate your CGT bill when the annual exempt amount reduces.
Remember, your losses can be measured against your capital gains for any given tax year, meaning they can be used to reduce the amount of CGT you pay overall.
For example, in May 2023, you earn an £8,000 profit from shares you sell outside of an ISA. The CGT annual exempt amount is now £6,000 – so, as a basic-rate taxpayer, £2,000 would be subject to 10% CGT.
However, later that year, you sell an asset and make a £3,000 loss overall. This means that by the end of the 2023/24 tax year, your gains will even out at £5,000, meaning you still fall into the CGT annual exempt amount for that year, and may not pay any tax on these gains.
What’s more, you can carry forward up to four years of unused losses – so if you have undeclared losses from the past few years, you can use these to help reduce your CGT bill in 2023.
3. Split your assets between yourself and your civil partner or spouse
One simple yet incredibly impactful way to effectively double your CGT annual exempt amount is to split your assets between yourself and your spouse or civil partner.
Your CGT annual exempt amount applies only to you – meaning shared assets can essentially double your tax break.
When your CGT annual exempt amount reduces to £6,000 in April 2023, it means a larger portion of your profits are likely to be taxed than before. As it will halve again in 2024, now is the time to make a plan with your spouse.
By arranging assets between yourself and your spouse, your joint effective CGT annual exempt amount could remain at £12,000 in the 2023/24 tax year, providing further opportunities to grow your wealth.
Get in touch
To discuss how the CGT annual exempt amount reduction (or any other tax changes) might affect your wealth, please get in touch. Email firstname.lastname@example.org or call 0161 8080200.
This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.