How to make the most of your Capital Gains Tax allowances

Currently, an individual can make total gains of £3,000 per tax year on assets they have sold or ‘disposed’ of before they pay CGT. This is referred to as the Annual Exempt Amount.

For example, if you were to buy a piece of art for £5,000 and later sell it for £20,000, you will have made a £15,000 gain on the asset, and you may need to pay CGT on this £15,000 sum. Assuming you’ve ‘disposed’ of no other assets in the current tax year, you would need to pay CGT on £12,000 – the capital gain (£15,000) less the CGT allowance (£3,000).

Disposing of an asset is not limited to just selling it. It can also include:

• Giving it away as a gift (although there are special rules for CGT on gifts to your spouse or civil partner or charity)
• Transferring it to someone else
• Swapping it for something else
• Getting compensation for it (such as an insurance payout if it’s been lost or stolen).

What do you pay capital gains tax on? 

Some gains are exempt from CGT, such as those made on the sale of assets held within tax wrappers such as an ISA, Lifetime ISA, Junior ISA or a pension. You also don’t pay CGT on assets you gift to your spouse or UK registered charities. When it comes to property, you usually do not pay CGT when you sell the home you live in.

You will usually need to pay CGT when you sell the below assets if they have gained value during your ownership:  

• Shares or other investments held outside tax wrappers
• Most personal possessions worth over £6,000 (excluding cars). This includes items such as jewellery, paintings, antiques or collectibles (such as stamps or coins)
• Property that is not your main residence: for example, a buy-to-let property or a holiday home
• Your main home if you’ve let part of it out (this does not include having a lodger), used it for business or if it’s a very large property (grounds totalling over 5,000 square metres)
• Business assets such as land, buildings, or equipment.

However, there are also exemptions and allowances that reduce or remove the need to pay tax.

How much capital gains tax will you have to pay?

When calculating the amount of CGT you need to pay, different rates apply based on your income level and can vary by the type of asset.

Basic rate taxpayers

The CGT rate is 18%.

Higher or additional rate income taxpayers

The CGT rate is 24%. The same rate is applicable on both residential property and chargeable assets.

However, if you’re a basic rate taxpayer, there’s a little more to calculate to ensure the amount you pay is accurate.

You need to know:

• Your taxable income. This is your income, minus the personal allowance and any other income tax reliefs you’re entitled to
• Your total taxable gains after the CGT annual allowance of £3,000.

Then, add your taxable income to your total taxable gain after the annual allowance.

If this pushes you from being a basic rate taxpayer into the higher-rate bracket, you will pay CGT at the higher rate.

If, however, this figure is still within the basic rate income tax band (£12,571 – £50,270), then you’ll pay 18%.

How investors can reduce their CGT liability

1. Maximise usage of tax wrapper allowances

Every tax year, adults in the UK have an ISA allowance – currently £20,000. Any interest, dividends or other returns generated by investments held within a Stocks and Shares ISA will be exempt from any form of tax under current government policy.

2. Move money from a General Investment Account to a Stocks & Shares ISA

Moving money from a GIA into a Stocks and Shares ISA within your annual ISA allowance can help ensure more of your investments – and therefore potential capital gains – are tax wrapped. You may have to pay CGT when you sell investments held in a GIA.

3. Use a personal pension

Investments held in a personal pension are also exempt from CGT, although withdrawals are subject to income tax. The amount you can contribute per tax year will depend on your personal circumstances, but can typically be up to £60,000. You may be able to contribute more if utilising 'carry forward'. You can find out more about 'carry forward' and the annual allowance here.

So, for those who have money they don’t need to access until they retire, increasing pension contributions may be worthwhile. Please note that high earners may have a reduced pension annual allowance.

Other options to consider

There are some additional options that could help you minimise your CGT liability, though they may require financial advice. These include:

• Selling a certain amount of your assets that sit outside your ISA or pension each year to make the most of your CGT allowance
• Transferring assets to your spouse or partner to ensure that you make use of both of your CGT allowances
• Carrying forward any capital losses you have made in earlier years to reduce your capital gains tax liability.

Risk warning

As with all investing, your capital is at risk. The value of your portfolio with J.P. Morgan Personal Investing can go down as well as up and you may get back less than you invest. ISA/JISA/LISA/ Pension eligibility rules apply. Tax rules vary by individual status and may change. This is general information, not personalised tax advice. If you are unsure if a pension is right for you, please seek financial advice.