Tax planning - capital gains tax

Planning in this area is even more key than usual, as a phased reduction in the capital gains tax (CGT) annual exemption is on the horizon. Currently £12,300, the exemption falls to £6,000 from 6 April 2023. A further reduction then takes effect from 6 April 2024, when it drops to £3,000. The move is expected to raise an additional £25 million in tax revenue in 2023/24 alone.

A key component of any such planning is to make best use of the annual exemption.

The annual exemption cannot be carried forward and therefore it may be efficient to make disposals before 6 April 2023 in order to utilise this year's exemption. The timing of the disposal may also have an impact on the rate of CGT payable. For example, if a taxpayer is a basic rate taxpayer in 2022/23 but expects to be a higher rate taxpayer in 2023/24, then it may be preferable to make any disposals before 6 April 2023 in order to benefit from lower rates of CGT.

If the opposite is true and a taxpayer is higher rate in 2022/23 but expects their income levels to drop in the 2023/24 tax year, then it may in fact be more beneficial to hold off on any disposal until at least 6 April 2023. Similarly, if you have already made substantial disposals in the current tax year, it may be beneficial to hold off any further disposals until 6 April 2023 where you may utilise next year's annual exemption and potentially lower rates of CGT.

Please be aware that gains on the disposal of residential property have to be reported to HMRC within 60 days (an increase from 30 days for disposals on or after 27 October 2021). Any CGT due is also payable within the 60-day limit.

Spouses may wish to transfer shares of assets between each other so as to utilise both annual exemptions. For example, a taxpayer can transfer 50% ownership of property, investments, and other assets to their spouse with no CGT impact (no gain or loss arises on this transfer). When an eventual disposal takes place, any chargeable gain will be split between the two taxpayers. This means being able to utilise two annual exemptions. CGT is charged at a lower rate of 10% (18% on residential property not qualifying for Private Residence Relief or other reliefs) for UK basic rate taxpayers to the extent that the gain is within their remaining basic rate band. Any gain exceeding the remaining basic rate band is taxed at 20% (28% for residential property). Higher and additional rate taxpayers pay CGT at 20% (28% on residential property). Where one spouse is a higher rate taxpayer, and the other has not used their basic rate band in its entirety, transfer of assets thus also has the potential to enable access to the 10% tax rate, rather than the 20% tax rate.

If you are considering disposal of any assets, you should consider whether you may benefit from transferring a share to your spouse prior to disposal. The costs of making the transfer (e.g. legal costs) should also be factored in. In addition, it may have an impact on the reliefs available on the sale, e.g. Business Asset Disposal Relief, and you should seek tax advice prior to transferring an asset to your spouse. Legal advice may also be required.

Where there is jointly held property, the share of ownership is a question of fact. It is possible to nominate on form 17 that unequal interests are held in a property. This can assist in tax planning by directing gains to the spouse with the ability to pay less tax when the gains are realised. The form also has effect for income tax purposes, where the income will be split in the same proportion to the capital interest held (otherwise, income on jointly held property is automatically split in equal shares).

It is essential to get the detail of any transfer correct, however, so we recommend speaking to our experts before taking action. Scottish taxpayers pay CGT based on UK rates and bands and therefore should assess the position based on UK rates.

Read the next section of our tax planning guide: Gift Aid or return to the main page.