Capital Gains Tax – Changes to the Annual Exemption

What is Capital Gains Tax?

Capital Gains Tax (CGT) is payable on the disposal or sale of certain assets, this includes second homes, investment properties, art, antiques or shareholdings (held outside of an ISA or PEP).

In summary, CGT is calculated on the difference between the acquisition value of an asset and its sale or disposal value. This can also include gifted assets. The rates of Capital Gains Tax are either 18% or 28% on disposals of residential property and 10% or 20% on the disposal of other assets. Principal Private Residence Relief is available on the disposal of your main residence, making these disposals exempt from CGT. Entrepreneurs Relief is also potentially available on gains made on the sale of businesses charged to CGT.

Allowable expenses can also be deducted when calculating the tax due. One such allowance is the Annual Exemption Allowance (AEA). In April 2023 the AEA was reduced from £12,300 to £6,000 for individuals and personal representatives. The next tax year (2024/2025) will see a further reduction of the AEA from £6,000 to £3,000.

The Government had estimated that in this tax year (2023/2024) with the first reduction, circa 500,000 individuals and trusts could be affected by these changes to the AEA. By the 2024/25 tax year, the Government estimates that an additional 260,000 individuals and Trusts may be liable for CGT.

These changes have already had a significant impact on the administration of estates. The sale of houses, investments, shareholdings and other assets have all been affected. With further changes coming into place in the next tax year, estates where assets are sold at a higher value than the ‘date of death’ value and therefore subject to a CGT charge will be affected to an even greater extent.

Where CGT is not payable, where there is a gain of at least £50,000 there is still a requirement to report this to HMRC.

The reduction in the AEA together with the Government’s plan to halve the dividend allowance is expected to raise over £1.2 billion a year from April 2025. With the limit for Entrepreneurs Relief being reduced from £10 million to £1 million in 2022, CGT is set to be a big earner for the Government, widening the net of individuals, trustees, personal representatives and business owners who will need to consider its implications. Those who will now be subject to CGT need to be aware of how it may affect them and take appropriate advice.

For enquiries relating to Capital Gains Tax Changes, please contact Aarti Gangaramani.

By email: aarti.gangaramani@wellerslawgroup.com

By phone: +44 (0) 20 7481 6386