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Understanding capital gains tax (CGT) allowance is crucial for individuals and small businesses looking to optimise their financial strategies.
CGT, a tax on the profit when you sell or 'dispose of' an asset that has increased in value, is not just a matter for the wealthy or large corporations; it's increasingly relevant to a wider audience, including small business owners and individual investors.
As we approach the Self Assessment deadline (also a deadline to report many types of capital gains) on Jan 31st, it’s vital to have clarity on the regulation changes from the previous year, such as the allowance decrease. And the upcoming adjustments for tax year 2024/25.
In this guide, we'll assess the intricacies of the current CGT allowances for 2023/24, and the key points for 2024/25. Delving into the specifics of how these changes will impact your finances.
From discussing the imminent allowance reductions to exploring various tax reliefs and exemptions, we aim to provide a comprehensive overview of CGT that empowers you with the knowledge to plan ahead. So you can make informed decisions and avoid unexpected tax bills.
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Capital Gains Tax Allowances for 2023/24
In the tax year 2023/24, regulation for Capital Gains Tax (CGT) in the UK has shifted significantly. The Annual Exemption Allowance (AEA) has had a notable reduction.
This allowance is the tax-free threshold up to which individuals can realise capital gains without incurring CGT.
For the tax year 2023/24, the CGT allowance stands at £6,000, a considerable decrease from the previous allowance of £12,300. And is set to be scaled down further to just £3000 in tax year 2024/25.
The lower thresholds mean even smaller gains will be subject to taxation. And this reduction could potentially bring more individuals into the CGT bracket, impacting their financial decisions, especially those considering the sale of assets that have appreciated significantly in value.
Understanding how different types of assets are taxed under CGT is also essential. For instance, shares and commercial property gains are generally taxed at rates of 10% and 20%, while residential properties attract higher rates of 18% and 28%.
These rates are contingent upon the total taxable income and gains of an individual. For a full breakdown on tax rates see this article.
Impact of Changes on Individuals and Small Businesses
The forthcoming reductions in the Capital Gains Tax (CGT) allowances in the UK will significantly affect small businesses and individuals in multiple ways. Requiring a proactive approach to financial management.
Increased Tax Liability
The most direct impact of the lower CGT allowance is an increased tax liability for those with capital gains exceeding the new thresholds. With the allowance set at £6,000 for 2023/24 and further reducing to £3,000 in 2024/25 (£1,500 for Trustees), more individuals and businesses are likely to incur CGT. This could lead to higher tax bills, particularly for those with investments in property, stocks, or other appreciating assets.
Strategic Asset Disposal
The reduced allowance may necessitate more strategic thinking around the timing of asset disposals. For instance, realising gains in a year where other income is lower might minimise the overall tax burden, considering the progressive nature of CGT rates.
Broader Tax Planning Considerations
This change calls for a broader reevaluation of tax planning strategies. It might be beneficial to spread out asset disposals over multiple years or consider other tax-efficient investment vehicles. For small businesses, this could mean revisiting investment strategies and considering the structure of their asset holdings.
Impact on Investment Decisions
The new allowances could influence investment decisions, with investors potentially seeking assets with lower volatility or different types of returns. Understanding how various types of investments are taxed under CGT is now more important than ever.
Increased Importance of Tax Advice
Given these complexities, the role of professional tax advice becomes more critical. Tailored guidance can help individuals and small businesses navigate these changes effectively, ensuring compliance while optimising their tax position.
Rates of Tax for Different Assets
To take action on the points above, it’s necessary to have a clear and concise understanding of how different assets are taxed under the Capital Gains Tax (CGT) regime. The following table outlines the tax rates for various asset types as of the tax year 2023/24:
Note: These rates are subject to individual circumstances, including total income and the nature of the asset. It's important to consult a tax professional to understand how these rates apply to specific situations.
Also, try our handy Capital Gains Tax Calculator to work out what you need to pay.
Exemptions and Deductions
To simplify the exemptions and deductions available under the Capital Gains Tax (CGT) framework, see the table below:
This is a succinct overview of the key reliefs and deductions that can be leveraged to manage CGT liabilities. Again, note that eligibility for these reliefs depends on individual circumstances and specific criteria.
Tax Planning Strategies
In light of the changes to Capital Gains Tax (CGT) allowances, here are some concise strategies to consider for effective tax planning:
- Asset Disposal Timing: Consider the timing of selling assets. Realising gains in a year with lower income might reduce the overall tax rate on those gains.
- Utilise Losses: Offset any capital losses against gains in the same tax year. If there are no gains, carry forward these losses to future years.
- Spread Out Gains: If possible, spread the realisation of gains over multiple years to avoid surpassing the CGT allowance threshold in a single year.
- Invest in Tax-Efficient Vehicles: Explore investments in ISAs or pensions, where gains are not subject to CGT.
- Consider Main Residence Relief: If selling a property, the main residence relief could exempt the gain from CGT.
- Leverage Business Asset Disposal Relief: For qualifying business assets, this relief could significantly lower the CGT rate.
- Gift Assets Strategically: Use gift hold-over relief to defer CGT on gifts of assets to family or charity.
- Seek Professional Advice: Always consult with a tax professional to understand the complexities and opportunities specific to your situation.
Special Investment Schemes
Taking advantage of various investment schemes can also be a smart and productive way to manage Capital Gains Tax (CGT) liabilities. Here are some key schemes and their benefits:
Enterprise Investment Scheme (EIS):
- Offers tax reliefs, including up to 50% income tax relief on the value of the investment.
- Provides CGT exemption on disposal of shares and CGT deferral relief.
- Suitable for investments in early-stage, growth-focused companies.
Seed Enterprise Investment Scheme (SEIS):
- Similar to EIS, but targeted at smaller, early-stage companies.
- Offers up to 50% income tax relief and CGT reinvestment relief, which can halve the CGT payable if gains are reinvested in SEIS-eligible shares.
Venture Capital Trusts (VCTs):
- Tax-advantaged investment wrapper focusing on small, unquoted UK companies.
- Provides income tax relief, CGT exemption, and the potential for tax-free dividends.
- Offers diversification as investments are spread across a portfolio of companies.
Each of these schemes has specific eligibility criteria and risks associated with them. They are particularly suitable for individuals who are comfortable with higher-risk investments.
Reporting and Compliance
To report Capital Gains depends on the type of asset you hold. It will done by one of the following methods:
- Capital Gains Tax on UK property account (If you sold a property in the UK on or after 6 April 2020)
- Real-time reporting or Self Assessment (If you have other capital gains to report) See our guide on the SA108 form.
Adhering to reporting requirements and maintaining compliance are critical aspects of managing Capital Gains Tax (CGT). Here’s what you need to know:
Compliance for Different Asset Types - Different assets might have varied reporting requirements. For example, shares and investment properties are treated differently under CGT rules.
Keeping Records - Maintain detailed records of all transactions related to assets subject to CGT. This includes purchase and sale dates, amounts, and any associated expenses. These records are crucial for accurate CGT calculation and for providing evidence in case of HMRC inquiries.
Awareness of Changes in Tax Laws - Stay informed about any changes in CGT legislation and reporting requirements. Tax laws can evolve, and staying up-to-date is key to ensuring compliance and making informed decisions.
Consideration of Annual Tax Returns - For non-property assets, CGT liabilities are typically declared through self-assessment tax returns. Ensure these are completed accurately and filed by the deadline to avoid penalties.
In addition, a knowledge of the key rules and guidelines around Capital Gains Tax (CGT) Annual Allowance in the UK can be very useful. Here's a simplified table to encapsulate these rules:
Use Crunch to Make Capital Gains Filing Easy and Cost-effective
Being informed of, and adapting to, the CGT allowances and rates, especially with the upcoming reductions, is essential for effective financial planning and compliance in the UK.
At Crunch we are experts in helping individuals and small businesses make the most profit from their assets by saving you as much on tax as humanly possible.
By using our Self Assessment service you can let us handle the complicated tax administration and relax in the knowledge your tax return will be filed on time and error free. Getting your new tax year off to a successful start.
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