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One thing was clear in last month’s Budget: the Chancellor plans to rely on background Tax Efforts are being made to remove the shortcomings in public finance.
Rachel Reeves may not have raised your income tax rate, but You are likely to hand over more money to Taxman In the coming years.
an area where the government will make money capital gains tax (CGT). Data from Hargreaves Lansdowne shows HMRCThis will increase from £13.7 billion at the start of this Parliament to £30 billion by 2030/31.
“The cuts to the CGT allowance have been swift and dramatic,” says Sarah Coles, head of personal finance at Hargreaves Lansdown.
“That means more people have to pay more of this tax, and some people are being exposed to it for the first time,” says Coles. And that’s not the only reason this tax is set to take a huge chunk out of your profits.
What is capital gains tax?
You pay CGT on the profits you make from selling or disposing of an asset.
Taxes are made on profits, not the full sales price, and you can deduct certain expenses as well.
Capital gains tax is levied on profits from the sale of second homes and let-out properties, as well as on investments and assets such as art, antiques and jewelery if they are worth more than £6,000 each. Crypto assets are also subject to CGT.
Basic rate income taxpayers pay 18 per cent CGT, but this rises to 24 per cent for higher and additional rate taxpayers.
Why would you pay more CGT?
The surge in CGT receipts is due to several factors. It started with a cut in the capital gains allowance – this is the amount you can make by selling a property before tax is due. This was £12,300 before being cut to £6,000 in 2023 and is now just £3,000.
Additionally, the main CGT rate has also increased. Basic-rate taxpayers pay it at 10 per cent and the top rate was 20 per cent in 2023. This increases to 18 percent and 24 percent in October 2024.
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This increase in rates becomes even more powerful when combined with a fixed tax cap. As more people are dragged into paying a higher rate of income tax, they will also pay a higher CGT rate.
“People are also realizing significant benefits,” says Coles. “Homeowners are continuing to sell as regulations tighten, and investment properties purchased before the pandemic surge may have made impressive gains.
“Meanwhile record levels of share prices mean people are investing outside there is one Or the pension may also have a large CGT bill. “Nobody is lamenting over getting more benefits, but they may have to bear the brunt of higher taxes.”
This means HMRC is set to more than double its CGT income over the next five years.
How to deduct your CGT bill?
“For wealthy families, entrepreneurs and long-term investors, capital gains tax is more than a technicality; it’s a material drag on the value you work hard to build,” says Bertie Scott-Hopkins, director of EXE Capital Management and chartered financial planner.
“Fortunately, the UK tax system offers a wide range of legitimate and highly effective strategies to reduce, defer or even eliminate CGT risk when your planning is proactive and well-structured.”
The best way to cut the CGT bill is to make the most of your tax-free allowance and also use your spouse’s or civil partner’s allowance. Each of us can make up to £3,000 of profit per tax year without paying CGT.
You can transfer property to your spouse or civil partner without paying any tax, so make sure you use both of your allowances. It may also help if one of you pays income tax at a lower rate. If the property is transferred to them before sale, you will see your CGT rate reduced from 24 per cent to 18 per cent if you are a higher or additional rate taxpayer.
“Thoughtful planning of sale dates, especially between spouses, ensures greater profits in this tax-free realm,” says Scott-Hopkins.
Plus, use your £20,000 ISA allowance each year. “You should keep as much of your portfolio as possible in an ISA,” says Coles, “because you won’t pay tax on gains or income.” If you have investments outside an ISA, you can use the Beds and ISA process to transfer eligible assets into an ISA.
You can also use any loss incurred when selling a taxable asset to offset other gains in the same or future tax years. HMRC allows you to offset them for up to four years.
“Carrying forward losses creates a valuable buffer that can neutralize future gains and smooth out long-term tax risk,” says Scott-Hopkins.
Finally, consider postponing the sale until you’re in a lower tax bracket. “In a year when income is low, for example receiving benefits after retirement, can significantly reduce the CGT rate,” he added. “With careful timing, it becomes one of the simplest and most effective planning tools.”
When investing, your capital is at risk and you may get back less than you invested. Past performance does not guarantee future results.