The race is on to get one last shot at the £12,300 capital gains tax ‘allowance’ for clients with gains in their investment portfolios.
The CGT annual exempt amount is due to be cut to £6,000 from April 2023, and then cut again the following year to just £3,000.
HMRC estimates that halving the exemption will result in additional 235,000 more people needing to report their capital gains, with fewer than 100,000 of those affected routinely filing self-assessment returns.
This figure assumes that existing behaviours continue. In reality, many will simply reduce the amount of gains they crystallise to just below the new CGT exempt amount each year.
How will these changes affect clients, why are they happening, and what will advisers need to bear in mind when discussing CGT with clients this year and in the years to come?
What is happening?
The first question clients will have for their advisers is, 'what does this mean for me?'
Compared to this year, clients with an income over the higher rate threshold and gains above the new allowance could be paying up to an extra £1,260 in 2023-24, with the prospect of a further £600 the following year.
For basic rate taxpayers, these amounts halve to £630 and £300 respectively. And, of course, these amounts may be higher still if the capital gain is from the disposal of residential property, which is taxed at 18 per cent and 28 per cent.
The cut to the exemption will have an even bigger impact for trustees who already only receive half the annual exempt amount and pay CGT at the higher rate of 20 per cent. This will see the exempt amount cut to £6,150 for 2023-24, falling to £1,500 from the following April.
Why have these changes come about?
The need to increase tax revenues has brought the annual exempt amount – and how it is used – into sharp focus.
Its purpose was discussed in a recent Office of Tax Simplification review of CGT, which explored such questions as whether it was there to act as an administrative de minimis threshold to reduce the number of individuals needing to report capital gains, or if it had in fact become a substantive relief, similar to the income tax personal allowance.
HMRC data suggested that the exempt amount was in many cases being treated as an ‘allowance’, with a significant spike in the number of taxpayers who had gains just under the annual exempt amount every year.
It was also identified that the vast majority of these gains related to disposals of shares and investment funds.
What to consider before tax year end
These findings do not come as a surprise. Crystallising gains up to the allowance has been an effective part of tax year end planning for many advisers who actively manage their client portfolios, delivering an opportunity to take a slice of investment profits tax free.
But with the tax benefit of this approach set to reduce over the next two tax years, it means taking advantage of the £12,300 on offer this year is even more important.
