- CGT rates changed immediately to 18% and 24% respectively
- CGT annual exempt amount can be used in the most advantageous way
- Losses can also be used in the most advantageous way
Key takeaways from this article
Prior to the autumn budget Capital Gains Tax (CGT) we had 3 main rumours circulating:
- Rates would increase
- Annual exempt amount (AEA) reduced further or removed, and;
- The uplift on death removed.
Following 30th October only one of these changes was announced. With immediate effect CGT rates for disposals on or after budget day are:
- Basic rate - 18%
- Higher and additional rate - 24%
These align to the previous residential property rates leaving us with single rates applying across property and other asset types. Further changes were announced to Business Asset Disposal Relief so that business gains continue to align (subject to limits) to the basic rate from 2026.
On face value a change in rates seems to be relatively simple, however it has raised questions about scenarios where gains (and losses) have been made before and after 30 October 2024 and how you can arrange allowances, tax bands and losses to your client’s advantage.
Taxation of Chargeable Gains Act 92 Section 4B(2) permits the AEA to be set off against gains in whatever way is most beneficial to the taxable person. Typically, it will be the case that the most beneficial way will be to use the exemption against gains that attract a higher rate of tax in priority to gains that attract a lower rate.
Applying to the 30th October change, it might be that using the AEA against a gain made on or after that date. The same concept exists for losses i.e. they can be offset against gains in the most beneficial way.
Let’s look at a couple of examples:
Scenario 1 – basic rate taxpayer
- Share gains pre-30th October 24 - £5,000
- Share gains on or after 30th October 24 - £10,000
There is a choice as to whether the £3,000 AEA is offset against the £5,000 gain or the £10,000 gain. The comparison looks like this:
Offset against £5,000 gain:
|
|
Rate applicable |
Tax |
|
£3,000 of pre-30th gain |
0% as within AEA |
£0 |
|
£2,000 of pre-30th gain |
10% |
£200 |
|
£10,000 post-30th gain |
18% |
£1,800 |
|
Total |
|
£2,000 |
Offset against £10,000 gain:
|
|
Rate applicable |
Tax |
|
£3,000 of post-30th gain |
0% as within AEA |
£0 |
|
£7,000 of post-30th gain |
18% |
£1,260 |
|
£5,000 pre-30th gain |
10% |
£500 |
|
Total |
|
£1,760 |
The most beneficial option is to reduce the gain on or after budget day with the AEA reducing the amount of the gain liable at the new higher rates. We’ll now bring in a loss to show how this can further reduce the tax bill.
Scenario 2 - basic rate taxpayer
- Share gains pre-30th October 24 - £5,000
- Share gains on or after 30th October 24 - £10,000
- Loss bought forward - £5,000
Again, there is a choice as to whether the £5,000 loss is offset against the £5,000 gain or the £10,000 gain. We know the AEA is best used against the £10,000 gain so the comparison now only looks at allocating the loss:
Offset against £5,000 gain:
|
|
Rate applicable |
Tax |
|
£3,000 of post-30th gain |
0% as within AEA |
£0 |
|
£7,000 of post-30th gain |
18% |
£1,260 |
|
£0 pre-30th gain (as reduced in full by loss) |
10% |
£0 |
|
Total |
|
£1,260 |
Offset against £10,000 gain:
|
|
Rate applicable |
Tax |
|
£3,000 of post-30th gain |
0% as within AEA |
£0 |
|
£2,000 of post-30th gain (reduced by loss) |
18% |
£360 |
|
£5,000 pre-30th gain |
10% |
£500 |
|
Total |
|
£860 |
The most beneficial option is to reduce the gain on or after budget day with the loss, further limiting the amount of the gain liable at the new higher rates.
Although these articles look only at basic rate CGT, the same concept exists at the higher rate of 24% (20% previously). The impact is of course less as it is only a 4% change instead of 8% for basic rate tax-payers.
This simple allocation of AEA and losses can really make a difference to the tax payable. Gains disclosed via self-assessment should be automatically calculated in the most favourable way, however understanding this helps to check that this is the case.
A client does not lose the ability to offset in the most beneficial way if they have reported a property gain mid-year using the real-time CGT service. These gains must be included with other non-property gains at the end of the year allowing for a full calculation to be performed which could lead to a reduction in tax paid.
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The information provided in this article is not intended to offer advice.
It is based on Quilter's interpretation of the relevant law and is correct at the date shown. While we believe this interpretation to be correct, we cannot guarantee it. Quilter cannot accept any responsibility for any action taken or refrained from being taken as a result of the information contained in this article.