The recent increase in capital gains tax rates has many people pondering how to avoid capital gains tax (CGT) or at least reduce CGT exposure.

Capital Gains Tax Rates

In the 2024 Autumn Budget, Rachel Reeves announced various changes which we've summarized here. Focusing on CGT, we learnt that:

• The basic rate of CGT has increased to from 10% to 18%
• The higher rate of CGT has increased from 20% to 24%

With the tax brackets above, the Basic (18%) and Higher Rate (24%) of CGT are based on all income and gains made in the tax year. This means that if you earn an annual salary of £50,271, you essentially use up the entire Basic rate band for CGT purposes too. So, if you make a capital gain in that same year, then, following your £3,000 allowance (see more below), all of the gain will be subject to the higher rate (24%) of CGT. 

This is particularly important due to the tax band freeze. Tax bands generally rise in line with inflation, however, in 2022, the government froze the bands until 2028. This policy means that as many people receive salary increases (as expected - in part due to inflation), a larger than normal portion of people will be paying higher rates of tax as they move into higher tax bands. If you're running a business, learn about the most tax efficient directors salary 2024/25.

Capital Gains Tax Allowance

In addition to the rates of CGT increasing, the annual allowance for capital gains tax (annual exempt amount) that a person has each year before becoming liable to pay CGT has been shrinking at an alarming rate. Currently, the capital gains tax allowance is just £3,000, which is less than a quarter of the £12,300 available in 2022/23.

How can I reduce Capital Gains Tax legally?

The primary question then is how to reduce your tax liability whilst staying compliant. Fortunately, there are various capital gains tax exemptions and reliefs. Here are 10 ways to legally avoid or reduce your capital gains tax:

1. Wasting Chattel Exemption

This rule states that anything with a useful lifespan of less than 50 years is exempt from CGT. This includes machinery, handbags, watches, most alcohol (wines, spirits etc), antique clocks and even animals (racehorses).

Cars are also seen as wasting assets, therefore gains made on the sale of cars are exempt from CGT.

Since the vast majority of people make losses when selling these types of assets, the tax authorities don’t want you offsetting these losses against your gains.

2. Under £6,000 Proceeds Exemption

Provided an item sells for less than £6,000, you can sell personal belongings such as antiques, artworks, or jewelry without paying CGT. Learn more here.

3. Venture Capital Schemes (EIS / SEIS / VCTs)

There are several different ways in which you can make tax efficient and/or tax beneficial investments into unlisted UK companies, such as Enterprise Investment Schemes (EIS), Seed Enterprise Investment Schemes (SEIS), Venture Capital Trusts (VCTs). The company you invest in must satisfy certain conditions and issue the shares in a manner which complies with HMRC’s requirements. These schemes generally try to encourage investment into younger companies, so there can also be more risk attached to these sorts of investments. Qualifying investments in these schemes can attract relief for both Capital Gains Tax and Income Tax. We recommend that you speak with your Financial Advisor and/or your accountant before making these sorts of investments.

4. Spread Betting

Spread betting involves speculating on the direction of a market without owning the underlying security. Normally, if you bought shares for £10,000 and sold them for £15,000 you would pay tax on your £5,000 gain. However, if, through spread betting, you bet on the movement of the share price and were successful, making a gain of £5,000, you wouldn’t pay CGT at all. This is because HMRC views this as a “bet” rather than an “investment.” Spread betting is risky and we aren’t promoting it but you can learn more about spread betting tax benefits here.

5. Private Residence Relief (PRR)

Under the PRR rules, if you sell your primary home, provided it has been your main residence for the full period of ownership, any profit made is generally exempt from CGT. You may also be able to claim PPR if you temporarily rented out your household, subject to certain conditions and timelines.

6. ISAs

Individual Savings Accounts (ISAs) allow you to put £20,000 to work each year, tax free. This is because when buy and sell shares housed within an ISA, any gain is exempt from CGT. If the stock market is not for you, then you can also set up an interest bearing cash ISA which can also be tax free. You may wish to look into AJ Bell, Hargreaves Lansdown and Interactive Investor, all of whom provide various ISAs. Learn more about tax on ISAs here.

7. UK Gilts (treasury stock)

Bonds issued by the UK government (gilts) are exempt from CGT. Keep in mind though that these may be liable for income tax.

8. Gifts to Spouses

Gifts between spouses/civil partners are generally exempt from CGT. If you gift an asset to your spouse, there’s no CGT to pay at the time of transfer and the receiving spouse assumes the original cost basis (original purchase price) for CGT purposes. Learn more about CGT between spouses and partners.

9. Business Asset Disposal Relief (BADR)

Formerly Entrepreneurs' Relief, this relief is subject to specific conditions but allows you to pay a reduced CGT rate of 10% when selling business assets. This comes into play when selling all or part of your business or assets used within a business. This capital gains tax relief can be applied up to a maximum limit of £1 million in gains over your lifetime.

10. Rollover Relief

Under the Rollover Relief rules, if you sell a business asset and subsequently use the proceeds to buy another business asset, you can typically defer CGT under what's known as rollover relief. In such a case, instead of paying CGT immediately on the gain, it is deferred until you sell the new asset.

Non Resident Capital Gains Tax rules

If you are considering leaving the UK, you should be aware of the non resident capital gains tax rules. If you are a UK resident but your permanent home is abroad, there are special rules. In general though, should you leave the UK and live abroad:

• You do have to pay CGT on the gains you make on property in the UK (even if you’re a non-resident for tax purposes)
• You do not have to pay CGT on other UK assets such as shares in UK companies, unless:
  • You return to the UK within five years of leaving, or
  • You sell shares in a “UK property rich” company and you meet the conditions for an indirect disposal. A company is considered “UK property rich” if 75% or more of the company’s gross asset value is UK land.

We hope this provides you timely details on the UK Capital Gains Tax rules and how to avoid capital gains tax or at least reduce CGT exposure legally. If you have any questions, reach out to us here. If you’re looking for an accountant, please fill out the form on this page and we will be in touch.