13 ways to reduce your Capital Gains Tax bill

Capital Gains Tax is becoming a hot topic in the UK following the election of a new Labour Government in July 2024.

What is happening with Capital Gains Tax?

The new Chancellor of the Exchequer, Rachel Reeves, has ruled out any rises in Income Tax or National Insurance Contributions; however, increases to Capital Gains Tax have not been taken off the table. The result is growing speculation as we build up to the recently announced budget statement scheduled for October.

Amid this CGT rate speculation, it may be a good idea to consider your tax position, particularly regarding any capital gains expected in the future.

Here are 13 ways that you may be able to reduce your Capital Gains Tax liability, which can be explored right now. Some involve significant reliefs and exemptions, whereas others involve deferring taxes owed.

1. Make use of your annual Capital Gains Tax exemption (Annual Exempt Amount)

The Annual Exempt Amount (AEA) is a tax-free allowance that you can use to offset your capital gains each tax year. It means that if your total capital gains for the year are less than or equal to the AEA, you won't have to pay any CGT.

The AEA was reduced from £6,000 to £3,000 for 2024/25. It is important to remember that the AEA is an annual allowance, so any unused portion cannot be carried over to the next tax year.

The £3,000 AEA applies to individuals who make capital gains, personal representatives and trustees for disabled people. The AEA for other trustees is £1,500.

2. Pay a reduced CGT rate of 10% with Business Asset Disposal Relief (BADR)

Business Asset Disposal Relief (BADR) is a tax relief that allows individuals to benefit from a reduced Capital Gains Tax (CGT) rate of 10% on gains made from the sale of a business asset.

This relief applies to both partial and complete disposals of business assets. It's important to note that BADR can only be claimed on gains that fall within a lifetime limit, currently set at £1 million. Any gains beyond this limit would be subject to the standard CGT rates.

3. Make use of losses to reduce your CGT bill

When you sell an asset at a loss, capital losses are automatically deducted from capital gains arising from selling another asset in the same tax year.

However, the losses would go to waste if the gains are below the Capital Gains Tax Annual Exemption and therefore not taxable anyway. This highlights the importance of planning for tax implications before making such transactions.

4. Defer CGT by giving business assets away

Gift Relief is a tax relief that enables you to defer Capital Gains Tax (CGT) when you give away a business asset. This does not mean the CGT is written off—it means that instead of paying CGT on the gain when you give the asset away, the tax is deferred until the recipient sells the asset.

When exploring this option, it is important to bear in mind that Gift Relief is subject to certain conditions relating to the nature of the asset and the company.

Expert tax advice is recommended.

5. Enterprise Investment Scheme (EIS)

The Enterprise Investment Scheme (EIS) is a UK government initiative to encourage investment in early-stage, high-risk businesses. It offers significant tax relief to investors who purchase new shares in qualifying companies.

The EIS provides a considerable Income Tax benefit for investors (up to 30% on investments not exceeding £1m per year). It also offers significant Capital Gains Tax benefits:

• Investors who have made gains up to three years before or one year after making an EIS investment can apply for 'deferral relief'. This relief can be as much as 24% for gains on residential property and up to 20% for other gains (except carried interest, which is taxed at 28%).
• If you hold EIS shares for at least three years, any gains from selling the shares will be exempt from CGT. However, you must have also received and not withdrawn income tax relief.

6. CGT exemption through the Seed Enterprise Investment Schemes (SEIS)

The Seed Enterprise Investment Scheme (SEIS) is based on the Enterprise Investment Scheme (EIS), but it provides better tax relief for investments in smaller companies. SEIS aims to help start-up companies find investment by offering tax incentives to investors.

If an individual sells an asset and reinvests the gain into acquiring shares on which SEIS Income Tax relief is claimed, it is possible to exempt an amount of the gain from Capital Gains Tax when the asset is disposed of. The amount of the exempt gain is up to 50% of the amount reinvested.

7. 0% CGT when selling your business to an Employee Ownership Trust (EOT)

If you plan to exit from a business that has grown, Capital Gains Tax will be something you need to consider. By selling a controlling stake of your business (more than 50%) to an Employee Ownership Trust, the transaction may be subject to full relief from a Capital Gains Tax charge. This is a huge financial incentive for owners of valuable businesses with plenty of staff.

However, there are strict criteria for eligibility:

• The company must be a trading company or the holding company of a trading group.
• The EOT must be designed to benefit ALL employees, excluding any who owned more than 5% of the company within the ten years before the sale.
• The EOT must have a controlling stake in the company after the acquisition (and in future, to avoid potentially sizeable tax charges).
• Employees who are currently shareholders with more than a 5% personal interest in the company cannot make up more than 40% of the total employees.
• The EOT must benefit all the employees on equal terms.

8. Pay no Capital Gains Tax on Stocks & Shares ISA gains

One of the key advantages of a Stocks and Shares ISA is that any increase in your investments within the ISA is entirely exempt from Capital Gains Tax (CGT).

If it makes a sizeable profit, you can trade shares, funds, or other investments within your ISA without worrying about a tax bill. Stocks and shares ISAs can be a tax-efficient method to invest and increase your wealth.

If you are required to file a tax return, you are not obliged to report any interest, income, or capital gains from an Individual Savings Account (ISA).

9. Transfer assets between spouses to effectively double your CGT exemption

Most capital transfers between spouses are not subject to Capital Gains Tax. Transferring assets between spouses allows you to effectively double your annual CGT exemption.

Each individual has their own annual CGT exemption, which is currently £3,000. Transferring assets between spouses allows you to utilise both exemptions in a single tax year.

Be aware, however, that if the couple separates, the rules around transferring assets change. It is strongly advised to seek professional tax planning advice in such cases.

10. Defer taxable gains with Business Asset Rollover relief

Business Asset Rollover relief allows you to defer the taxable gain arising from the disposal of a business asset if you acquire a replacement asset within three years.

The relief applies to qualifying business assets, both the one being disposed of and the replacement must qualify.

It allows for the deferral of the taxable gain when the assets are disposed of or replaced. However, there may be exceptions to this relief, so seeking advice on specific types of assets is recommended to ensure eligibility and compliance with tax regulations.

11. Boost Pension Contributions to reduce your CGT liability

The rate of Capital Gains Tax (CGT) you pay when selling an asset is linked to your taxable income. You may be able to effectively reduce your taxable income by increasing your pension contributions. Reducing income to the basic rate income tax band often translates to a lower CGT rate. This can result in substantial savings when you sell assets that trigger a capital gain. It's essential, however, to stay within the annual pension contribution limits to avoid potential tax charges.

12. Offset expenditure from maintaining or improving an asset

Capital Gains Tax is typically owed on the profits gained by selling an asset that has increased in value; however, certain expenses can be offset against the capital gain to reduce this liability.

For example, costs incurred in improving an asset may be deductible from the sale proceeds before the capital gain is calculated. These could include renovation costs for a holiday home or professional valuation fees for a valuable asset.

13. Pay zero CGT when selling your home via Private Residence Relief

When you decide to sell your primary residence, you will typically be eligible for Private Residence Relief, a tax relief designed to exempt you from paying Capital Gains Tax on the sale.

This relief applies as long as you meet all the necessary conditions. However, it's important to note that the relief will be limited if any part of your home is used solely for business purposes. In such cases, you will be liable to pay CGT, but only on the portion of the home utilised for business activities.

The importance of specialist tax planning advice

When it comes to tax planning, there are many ways for both individuals and businesses to reduce their liabilities and ensure they are only paying what they need to. This planning often includes complex calculations and strict conditions.

Mistakes can be costly, including penalties from HMRC and interest payable on owed taxes. This is why we believe it is essential that you speak to a qualified tax adviser when exploring these options.

Please contact our teams below for advice on reducing your Capital Gains Tax or any other tax planning matters.

• Business Tax Planning
• Personal Tax Planning