Capital gains tax is pulling in far more money than it used to, and that means more people are now being caught by a charge once associated mainly with the wealthy. Income from the tax has jumped sharply as allowances have been cut and rates have risen, turning it into what one analyst called a “cash machine” for the government.
The rules matter because capital gains tax is charged on profit made when selling or disposing of assets that have risen in value. That includes investments held outside an Isa, property that is not your main home, and most personal possessions worth £6,000 or more, apart from a car.
Why the bill is rising
The annual exempt amount has been cut from £12,300 to £6,000, and now to £3,000. That allowance resets every tax year, so unused room does not carry over, according to Clare Stinton of Hargreaves Lansdown.
Rates were also increased in the October 2024 budget. Higher-rate taxpayers now pay 24% on gains, while basic-rate taxpayers pay 18% on some gains depending on the size of the gain and their taxable income.
Ways to reduce a capital gains tax bill
Married couples and civil partners can usually transfer assets between themselves without triggering capital gains tax. Stinton said that can help both people use their annual allowances, creating up to £6,000 of gains before tax is due.
For investors, using the Isa wrapper matters more than ever. UK residents aged 18 and over can invest up to £20,000 each per tax year, while parents can pay up to £9,000 a child into a junior Isa, which Elsa Littlewood of BDO said can total £58,000 for a family of four.
Selling investments outside an Isa can create a CGT bill, but losses can be offset against taxable gains in 2026-27 or later years, as long as the claim is made through a tax return. Littlewood said matching gains and losses can cut the overall tax bill.
Other reliefs that can help
Elsa Littlewood said people with adult children planning to buy a home may want to gift funds so they can invest in a lifetime Isa. Clare Moffat of Royal London said capital gains sit on top of taxable income when the rate is worked out, so lowering taxable income can reduce the CGT rate.
The two main ways to do that are by paying into a pension or making charitable donations. Moffat said a pension contribution could help keep a seller in the 18% CGT band instead of 24% if a gain would otherwise push them into the higher-rate band.
She also said inherited assets need careful thought. Inheritance tax is usually paid by the estate, but CGT may be due later if the asset is sold or given away by the person who inherited it.
According to www.theguardian.com, the Office for Budget Responsibility expects capital gains tax receipts to keep rising and reach £35bn in 2030-31. The same report noted that Wes Streeting last month set out plans for a wealth tax that would equalise CGT with income tax.