In March 2023 the Chancellor announced that the capital gains tax (CGT) exemption would be cut in half in April 2023 and the same again in 2024. What steps can you take to counter this indirect tax hike?
CGT exemption
Prior to 6 April 2023 every individual was entitled to £12,300 per year of tax-free capital gains from the sale or transfer of assets, within the scope of the capital gains tax (CGT) regime. The CGT exempt amount was more than halved to £6,000 for transactions on or after 6 April 2023 and to £3,000 from April 2024. The good news is that with some planning you may be able to indirectly increase the CGT exemption available.
Family CGT planning
If you’re married or in a civil partnership the first step to maximising CGT exemptions is to make use of both your and your partner’s exemptions. This requires one partner to a transfer part or all of the asset to the other before the sale. This can potentially save more CGT than results just from making use of your partner’s exemption, i.e. because depending on their income they might pay CGT on the gain at a lower rate than you.
Tip. If you have children still financially dependent on you, you can use a similar trick to make use of their annual CGT exemptions. Before going down this route there are one or two important things you need to know about the consequences:
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- while your children are minors income derived from the asset given away, e.g. dividends, remains yours for tax purposes
- if you gift assets to your children (or anyone else apart from your spouse/civil partner) it’s treated for tax purposes as if you had sold it to them at market value, i.e. what you would get if you sold to a third party. Note. There’s a related special anti-avoidance rule involving tax losses.
Non-tax motives with a tax advantage
Transferring assets to your minor children or buying assets on their behalf doesn’t mean that the money is tied up until they’re 18. You’re entitled to sell assets on their behalf and use the proceeds for their welfare and education. If you didn’t do this you’d be using your money to pay for their upkeep anyway so gifting assets and selling them to pay for your children’s welfare is financially neutral. The following example illustrates how the tax break can work in practice.
Example. Janet is a higher rate taxpayer. She has two children, aged nine and twelve. Janet owns a portfolio of quoted shares. In June 2023 she gives shares in various companies to each of the children. Because the shares are worth more than Janet paid for them by, say, £5,000, this amount is a taxable gain for Janet for 2023/24 but within her annual CGT exemption so there’s no tax to pay.
A few years later (when the CGT exemption is £3,000) some of the shares owned by the younger child are sold to fund a school trip abroad. They are worth £4,000 more than when Janet gifted them. The child’s annual CGT exemption means only £1,000 of the gain is taxable (at 10%). This has no impact on Janet’s exemption meaning that she can use it to cover gains she makes from the sale of shares or other assets. Had Janet retained ownership of the shares and sold them herself to fund the school trip, having already used her annual CGT exemption, the gain would result in a tax bill of £800.
Transfer assets to your spouse/civil partner to make use of their annual exemption and, if applicable, their lower CGT rate. If you have children you can do the same with them. While there are special anti-avoidance rules to watch for, this strategy can, e.g. save you £800 CGT per year, per child on a gain of £4,000.
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.