A growing number of UK taxpayers are finding themselves subject to Capital Gains Tax (CGT), as recent rule changes have broadened the levy's reach beyond traditionally wealthy individuals. This shift has significantly boosted government revenue, with income from CGT soaring by almost 80% to £24.3 billion in the last financial year. This figure represents a sharp increase from £13.7 billion in the preceding year and more than triples the amount collected in 2017-18, according to analysis by investment platforms.
CGT is a tax levied on the profit made when an asset that has increased in value is sold or 'disposed of'. Assets commonly subject to CGT include investments not held within an ISA, properties that are not a primary residence, and most personal possessions valued at £6,000 or more, excluding cars. The Office for Budget Responsibility, the government's economic watchdog, has forecast that CGT receipts are likely to continue their upward trajectory, potentially reaching £35 billion by 2030-31.
A key factor in the expanded scope of CGT has been the drastic reduction in the annual exempt amount, the tax-free allowance for each tax year. Until 2022-23, this allowance stood at £12,300. It was subsequently cut to £6,000 and is now just £3,000. This reduction means that smaller gains now trigger a tax liability, pulling more individuals into the CGT net. Furthermore, CGT rates were adjusted in the October 2024 Budget, with higher-rate taxpayers now paying 24% on their gains. For basic-rate taxpayers, the rate is 18%, though this can vary depending on the gain's size and total taxable income.
In response to these changes, financial experts are highlighting legitimate strategies for taxpayers to mitigate their potential CGT bills. One common approach involves making full use of ISA allowances; UK residents aged 18 and over can invest up to £20,000 annually, with Junior ISAs allowing up to £9,000 per child. For married couples or those in civil partnerships, transferring assets between partners can enable both CGT allowances to be utilised, effectively doubling the tax-free threshold to £6,000. Additionally, investors can offset losses against taxable gains, either in the current or future tax years, provided these are claimed via a tax return.
Other methods for reducing CGT liability include contributing to a pension or making charitable donations, as these actions can lower an individual's taxable income. Clare Moffat, a pensions and tax expert at Royal London, explained that if a capital gain pushes an individual into a higher tax band, a pension contribution for the amount over the threshold could result in paying 18% CGT instead of 24%. The Labour Party has also indicated interest in reforming wealth taxation, with former Shadow Health Secretary Wes Streeting previously outlining plans for a wealth tax that would align CGT with income tax rates, aiming for a fairer system but potentially leading to higher bills for many affected.
The implications of these changes are significant for many households, requiring greater awareness and proactive financial planning to navigate the evolving tax landscape effectively.