The lowdown on Capital Gains Tax

When investment assets grow, it’s called a ‘capital gain’. So, when you sell those assets, you have to pay Capital Gains Tax (CGT) on the profits.

You get a tax-free CGT allowance every tax year. But it doesn’t carry forward (you have to use it or lose it), and the allowance has been reducing, as shown:

  • £12,300 2022/23
  • £6,000 2023/24
  • £3,000 2024/25

Sadly, the golden era is over! These days, you just have to accept there will be tax to pay on almost any capital gains. (And, no matter what happens in the General Election, this situation is unlikely to improve.)

This year’s CGT rates

For basic rate tax-payers:

  • 10% on your taxable income (that is, your income less your Personal Allowance and any Income Tax reliefs)
  • 18% on profits when selling residential property that’s not your main home

For higher rate tax-payers:

  • 20% on your taxable income
  • 24% on profits when selling residential property that’s not your main home

Note that these are not the world’s worst tax rates when you compare them to the 40% income tax you may be used to paying.

The other good news is that tax is something which can be controlled – when you have a good financial plan.

What a good financial plan looks like

At Plan100, we work out a cashflow plan that lasts until you’re 100, calculating how much income you’ll need during retirement and carefully arranging your investment portfolio to provide that. For example:

  • Maximising your pension allowance (within the restrictions that apply)
  • There’s also a £20,000 allowance which can go into tax-efficient ISAs

You don’t have to worry about capital gains within those wrappers.

Other investment vehicles that can be used include:

  • Venture Capital Trusts (VCTs)
  • Enterprise Investment Schemes (EISs)

Talk to us if you’d like help to reduce your CGT exposure.

Investing in stock markets v investing in property

Remember, investing in the markets gives you more flexibility than investing in property. For one thing, you can always sell a few shares if you need to.

When you only invest in property, it’s harder to do tax planning. You can’t just sell off one room in your second home. You have to sell the whole property and take the tax hit.

In a nutshell

With the reduction in CGT allowance, you need to be more cognitive about how you dispose of assets so you pay the minimum tax.

Related reading

This updates our 2016 article: CGT exemption: use it or lose it

For more information, please read or re-read our other articles on similar subjects:

Lance Baron

Certified Financial Planner (CFP) based in East Sussex, UK. We support people in Southeast England with more than £500K to invest by building a financial plan that will help them live the life they want… until age 100