From April 2023, the UK Capital Gains Tax Allowance (“CGT”) will be reduced from £12,300 to £6,000 for individuals and personal representative for the 2023/24 tax year and then further reduced to £3,000 in 2024/25. The CGT allowance for trusts is half the individual allowance so would be £3,000 for 2023/24 and £1,500 for 2024/25. How should you prepare for the change?
CGT is charged on the increase in value on the sale or gift of assets. The rates are either 18% or 28% on disposals of residential property and 10% or 20% on other assets. Disposal of your main residence is exempt from CGT and Entrepreneurs Relief may see the first £1 million of the gain on the sale of a business charged to CGT at the lower rate of 10%.
CGT is reportedly not a big earner for HMRC; it represents only about 1% of annual tax revenue.
CGT rates have, historically, been lower than income tax rates. The government described the CGT annual exempt amount, which has been frozen at the same level for several years as “generous” which was the rationale behind the cut from £12,300 to £3,000 over the next two years. This reduction, combined with their plan to halve the dividend allowance is projected to raise over £1.2 billion a year from April 2025. The limit for Entrepreneurs’ Relief was also reduced from £10 million to £1 million last year.
The reduction on the annual allowance will have a significant impact on most individuals, personal representative and trustees. Historically, the ‘generous’ capital gains allowance would have shielded many UK individuals from having to declare a CGT liability; it would be fair to say a minority of tax payers would find themselves liable to pay CGT; the wealth of most individuals not extending beyond their property, pension fund, ISAs or savings. The threshold decreases over the next two years we will see an increase in the number of UK tax payers filing a self-assessment tax return.
Transfers of ownership interests within marriage/civil partnership could serve to access two annual exemptions in respect of capital gains on a disposal and thereby reduce total CGT exposure, whether at current rates or any increased future rates.
These changes will also have a huge impact on the administration of estates given the substantial cuts that will be imposed. The sale of houses, investments, shareholdings and other assets will all be affected if assets are sold for higher than the ‘date-of-death’ values as personal representative only have a single CGT allowance which can be used during the tax year of the date of death or the two following tax years.
By reducing the annual exempt amount, the Governments estimates that for the year 2023 to 2024 around 500,000 individuals and trusts per year could be affected, increasing on a cumulative basis to 570,000 in 2024 to 2025. Of this group, by 2024 to 2025 it is estimated that 260,000 individuals and trusts will be brought into the scope of CGT for the first-time.
It is clear that the changes in the CGT allowance will impact those individuals, trustees, and personal representatives already subject to CGT but it will also widen the net. Those who now will be subject to CGT need to be aware of how it may affect them and take advice where appropriate.
Further Information
If in doubt, and in the interests of peace of mind, please do contact Diva Shah or the Private Client team.
About the Author
Diva Shah is an Associate in the Private Client team. Diva acts for various clients including high net worth individuals, entrepreneurs, executors, trustees and individuals who lack mental capacity
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