How to cut your capital gains tax bill

The tax-free allowance for capital gains was halved in April 2023, meaning investors and second-home owners are being forced to hand over more of their profits to the taxman. 

From April 6 2023, the threshold at which your capital gains fell from £12,300 to £6,000, and will fall again to £3,000 from April 2024, as part of a multi-billion pound tax grab revealed in last year’s Autumn Statement. 

Any gains over the allowance are taxed at a headline rate of 18pc, although a 10pc basic rate can apply in some cases. Higher rates of 28pc and 20pc apply to residential property. 

Second-home owners and landlords have to pay thousands of pounds more tax under the lower capital gains allowance. You can find out how much more you will owe to HMRC using our calculator below.

Savers have also been shaken by rumblings of what capital gains tax (CGT) might look like under a new government after the next election. Labour is also reportedly considering increasing rates in line with income tax, meaning the current rate could double to 40pc for a higher earner. 

This week Telegraph Money also reported on a legal ruling that could have big implications for people who were blocked from claiming CGT relief when they may have qualified. 

All of which means it is more important than ever to make the most of tax hacks that let you keep more of your gains. Here, Telegraph Money explores five of the options open to savvy investors.

Max out your allowance

One of the easiest solutions is to ensure the full tax-free allowance is used each year, because it cannot be applied retrospectively, carried forward or transferred to a spouse. 

Nimesh Shah, of accountants Blick Rothenberg, advised a tactic known as “bed and breakfasting” to help make the most of the full annual exemption. This involves selling shares either side of a new tax year to crystallise a capital gain. 

He added: “The tax rules to calculate capital gains mean you cannot repurchase the same shares within 30 days, but you could use your spouse or an Isa to purchase the shares and legitimately circumvent the 30-day rule.”

Claim for losses

Offsetting losses against any gains in the same tax year can also reduce your tax bill and any excess losses can also be carried forward to help with future tax liabilities. Investors would need to make a claim for capital losses, usually through a self-assessment tax return, and there is a four-year time limit. 

Capital losses from the 2018-19 tax year need to be claimed by April 5 this year.

Enterprise Investment Schemes

Investments in certain tax wrappers, such as Isas and offshore bonds, are not subject to CGT. Investors in Enterprise Investment Schemes (EIS), a type of high-risk venture capital investment, can also apply for a number of tax breaks, including up to 30pc income tax relief. 

Mr Shah said: “It is possible to defer capital gains into the EIS investment, but this decision should be carefully considered as the capital gains will be revived when the investment is sold and taxed at the rate at the time. 

“So this could be higher than the current CGT rate. Also capital gains on the sale of the EIS investment will be exempt from CGT only if certain qualifying conditions are met, including broadly holding the shares for three years.”

Private residence relief

Anyone selling property should consider private residence relief, the most lucrative tax break for taxpayers between 2021 and 2022 which saved them £37.3bn in capital gains tax. Under this relief homeowners pay no tax on any profits made when selling their main home, as opposed to buy-to-let properties. 

But Chris Etherington, of accountancy firm RSM, warned the tax break should not be taken for granted. Mr Etherington said: “There are various ways in which a homeowner can trip up and land with a surprise tax bill, alongside interest and penalties. 

“For example, those working or running businesses from home need to take care they do not inadvertently compromise the tax relief available to them.” 

Private residence relief cannot be claimed on parts of property used exclusively for business use, although having a “temporary or occasional” home office is allowed. Nor will HMRC allow you to claim the relief if the property has been let out – this can be tricky to navigate. 

HMRC states having a lodger does not disqualify a property owner from claiming private residence relief, although Mr Etherington warned Airbnb hosts and other short-term landlords can find themselves restricted. 

He added: “HMRC now has a vast array of data available to it and could contend tax is due on the sale of a home. 

“The annual exemption has been a safety net for those who unwittingly reduced the tax relief available to them on the sale of their home. But this is about to be substantially reduced and many more individuals, including homeowners, could be hit with a tax bill as a result.”

Transfer assets to spouse or civil partner

In the vast majority of cases, CGT is not payable on gifts to a husband, wife or civil partner, unless you separated and did not live together at all in the tax year. 

Mr Shah added: “Transferring effectively doubles the capital gains annual exemption which could be worth up to £3,444 in 2022/23.” 

However, your partner may be liable for tax if they later sell the asset and the gain will be calculated on the difference in value from when you first owned it and when they sold it.