Capital gains tax is charged on the profit you make when you dispose of certain assets that have increased in value, such as a buy-to-let property or valuable possession. While there is no way to avoid paying it, there are ways to minimise your liability.
Strategies to minimise capital gains tax include using certain tax reliefs, transferring assets to your spouse or civil partner, offsetting losses against future gains, and investing in ISAs. Planning ahead and consulting an accountant is wise to ensure you don’t miss out on valuable savings.
In this article, we will briefly describe what, how and when capital gains tax is due before delving into ways to minimise your next CGT bill.
Our highly experienced capital gains tax accountants can advise you on optimising your personal and business tax position for a more profitable future. For personalised advice on your capital gain tax liability, please contact Butt Miller.
What do you pay capital gains tax (CGT) on?
You pay capital gains tax when you have made a profit on the disposal of a chargeable asset which is in excess of your capital gains tax annual exemption (currently £3,000). ‘Disposal’ includes a sale, exchange or gift (although gifts to a spouse or civil partner may be exempt; (see more below).
Chargeable assets include residential property (excluding your main home), stocks, shares, businesses, and valuable possessions over £6,000. Occasionally, your main home will attract capital gains tax, particularly if you have let it out or used it for business.
You do not pay CGT on gains from ISAs, PEPs, UK Government Gilts, Premium Bonds, or even personal cars.
How is capital gains tax calculated?
It’s important to remember that capital gains tax is paid on the gain you make, not the sale price or market value. The percentage of CGT owed is based on your income tax band.
To calculate your CGT liability on chargeable assets:
- First, subtract your CGT allowance (£3,000 in the 2024/25 tax year) from the gain.
- Add the gain to the rest of your taxable income (including self-employed income, salary, rental income, investments, savings, etc.)
For gains made after 30th October 2024:
- If the total of your taxable income plus gains is lower than the higher rate threshold (currently £50,270), the CGT rate is 18% (up from 10% in the previous tax year).
- If your total income before the capital gain is less than the higher rate threshold but adding the capital gain takes the total above the threshold, part of the gain will be taxed at 18% and the balance above the threshold is taxed at 24%.
- If the amount of taxable income, excluding gains, is more than the higher rate threshold, the CGT rate on your capital gains is 24% (up from 20% in the previous tax year).
When is the best time to plan for capital gains tax?
Capital gains tax planning can be carried out at any time before an asset is sold, but ideally at the start of the tax year. Given the increase in capital gains tax rates in the autumn 2024 Budget, there is no time like the present.
When do you pay capital gains tax?
Gains on residential property must be reported to HMRC within 60 days of the sale completion date. Capital gains tax must also be paid within the same deadline.
Capital gains tax on any other chargeable assets is due in January following the end of the tax year in which the disposal takes place. Non-residential property gains are generally reportable on a self-assessment tax return. For example, shares sold in November 2024 would be reportable on a self-assessment tax return due to HMRC by 31 January 2026, with any tax due by the same deadline.
Strategies to minimise your capital gains tax bill
There is no way to avoid Capital Gains Tax, but there are ways to reduce your capital gains tax liability. Working with a chartered accountant is wise to ensure you pay precisely the correct amount – not too much or too little.
Capital gains tax allowance
Each individual UK resident and certain non-residents are entitled to a tax-free allowance for capital gains each tax year. The allowance is currently £3,000 until 5 April 2025. The relief cannot be carried forward if not used in the tax year, so any amount not used is lost after the end of the tax year.
Transferring assets to your spouse or civil partner
Giving assets to someone other than your spouse or civil partner incurs capital gains tax and is generally treated as if it were a sale at market value. Assets that are transferred between married couples or civil partners are treated as though there is no profit or loss on the transfer and are, therefore, exempt.
That means that married couples can reduce their capital gains tax liability by switching ownership of assets between them ahead of sale to use any allowances, losses or lower rate tax bands available to them.
For example, if you are a higher-rate taxpayer, you may wish to transfer ownership of a valuable asset to your spouse or civil partner who is a basic-rate taxpayer to reduce your overall tax charge.
When the asset is actually disposed of, the recipient spouse can deduct the transferor’s costs (i.e., what they paid for the asset or its value when they inherited it) from the sales proceeds before tax.
For transfers between unmarried couples or between family members, the transferor would be required to pay CGT on the difference between the market value at the time of transfer and the price they paid for the chargeable asset.
Private residence relief
One of the most notable ways of reducing a capital gains tax liability on residential property is private residence relief. This relief only applies to periods during which the owner actually lives in the property, but it is extended to the final nine months of ownership, regardless of whether the property was occupied during that period.
The relief is calculated by apportioning the gain realised on the property between the period you occupied the property as your only, or main, residence and the remainder of the period of ownership. You don’t need to get the property’s values on particular dates, as the rules only consider the average of the gain accumulated across the total period of ownership.
Letting relief
Letting Relief is available to landlords who have lived in a property while renting out part of it (to a lodger, for example). This relief can reduce the taxable gain by up to £40,000 per owner, but it does not apply if the entire property was rented out after the owner moved out.
Business Asset Disposal Relief (formerly known as Entrepreneurs’ Relief)
If you sell all or part of your business, you may qualify for Business Asset Disposal Relief (formerly known as Entrepreneurs’ Relief). This is a rate-reducing relief, meaning the tax on any qualifying capital gain is capped (14% from April 2025 and 18% from April 2026).
This relief is available to anyone who has operated as a sole trader, a partner, or a shareholder in a private trading company for at least two years.
If you are selling shares, for at least two years up to the point of disposal you must have been an employee or office holder of the company, and the company’s main activities are qualifying trades.
Rollover Relief
With rollover relief, you can delay paying capital gains tax on the disposal of business assets if you use all or part of the proceeds to buy new business assets.
You must buy replacement assets within three years after, or one year before, the disposal of a qualifying asset. Your business must be trading at the point of disposal of the old asset and the purchase of the new asset, and both assets must be used in your business.
Rollover relief is capped where only part of the proceeds from selling old assets are reinvested into new assets.
The gain is deferred by reducing the base cost of the new asset when it is disposed of.
Owning property through a Limited Company
Landlords with multi-property portfolios may benefit from owning the buy-to-let properties through a limited company.
A limited company must pay corporation tax on the rental profits and profits from property sales, which tends to be lower than the tax rates that would apply if the landlord owned the properties personally. However, there are additional personal taxes to pay if you want to take money out of the company.
Although the relatively lower tax rate on company profits compared to the tax payable by an individual can appear attractive at first glance, limited company structure may not be efficient for many landlords. It is important to obtain advice about your personal circumstances from a qualified accountant before making decisions about your valuable assets.
Using your ISA allowance
You do not pay income tax on interest or dividends earned within an ISA, nor do you pay capital gains tax on any profits made from investments within an ISA.
Each individual can invest a maximum of £20,000 into an ISA each tax year, and this limit is set to remain the same for 2025/26. The limit covers all ISAs you hold and is not an allowance per ISA.
Offset gains and losses
Not all assets sold make a gain. In cases where a capital loss is made, the loss made can be rolled forward and offset against future capital gains. However, if the asset sold is a type that would be exempt from CGT, such as your main home or shares owned in an ISA, your loss on these assets is unlikely to be available to set against gains made on other assets.
It is important to report to HMRC any capital losses that you have made if you are expecting to sell an asset which will make a gain. If you do not complete a self-assessment tax return, you should write to HMRC to claim any capital losses, or you stand a chance of being unable to use them in the future. You can claim losses arising as far back as four years preceding the current tax year.
A loss arising from one type of asset can be used against a gain from another type. For example, a loss on shares can be claimed against a gain on residential property.
Deductible costs
The cost of acquisition and enhancing the asset can often be deducted from sales proceeds, in addition to incidental costs of buying and selling the asset. This might include legal fees, Stamp Duty and lease purchase.
Relief is also given for the cost of improving assets. In relation to buildings, replacing existing fittings with fittings of the same quality or carrying out repairs and maintenance is not accepted as ‘improving’ the property. HMRC defines ‘improvement’ as work that changes the footprint of the property or reconfigures the internal layout, such as adding en-suite bathrooms to bedrooms, extensions, conservatories, etc.
Where something is being upgraded, for example, kitchen units and appliances are replaced with superior quality compared to its predecessor, the cost may count as enhancing the property and, therefore, be allowable.
Enterprise Investment Scheme (EIS) investment
The Enterprise Investment Scheme (EIS) is an initiative by the UK Government to encourage investment in early-stage businesses.
In addition to 30% income tax relief at the point of subscription, upon disposal of shares acquired through EIS, there may be two CGT reliefs available to investors:
- Disposal Relief gives exemption from capital gains tax for any increase in the value of the EIS company shares. Where shares in an EIS company are sold, disposal relief may be due if you have held the EIS shares for at least three years, and you received EIS income tax relief in full on the whole of your subscription in the shares, and none of this tax relief has been withdrawn.
Disposal relief is not available if you sell EIS shares within three years of the date they were issued to you.
- Deferral Relief is similar to rollover relief, allowing you to offset gains on any assets against the cost of purchasing EIS shares. The deferred gain comes back into charge when the EIS shares are sold.
Contact Butt Miller for advice on Capital Gains Tax
The Butt Miller team has many years of experience in complex capital gains tax planning. We can advise you on what reliefs you are entitled to in order to minimise your CGT liability.
Whether you need help with the computation of a capital gain or advice on setting up your assets in anticipation of a future sale, we are here to help.
Contact us today for friendly advice and to arrange a consultation.
