UNDER PRESSURE FROM his party, the Chancellor in his November 2022 budget made a significant alteration to the annual allowance for gains made on disposal of property assets.

In today’s Shipleys Tax brief, we look at the consequences of the upcoming change in the Capital Gains Tax (“CGT”) allowance and what it means for you and how you could save tax by being a little pro-active.

So, what’s happened?

Currently, the annual exemption for profits on disposal of property (amongst other assets) is £12,300. The government will reduce this to £6,000 on 6 April 2023 with a further reduction to £3,000 on 6 April 2024.

What does this mean for me?

Any gains made in excess of the annual exemptions above will be subject to capital gains tax at 10%, 20%, 18% and/or 28%, depending on the nature of the assets sold and on your individual taxable position.

The annual exemption for profits on disposal of property (amongst other assets) is £12,300. The government will reduce this to £6,000 on 6 April 2023 with a further reduction to £3,000 on 6 April 2024.

Also, as the basic threshold for inheritance tax (IHT) has been frozen at £325,000 since 6 April 2009 (and will be until at least 2026), property tax planning is increasingly important to mitigate the charge.

Gifting an asset to remove it from your estate as soon as possible is something many will consider. For example, an individual who makes a gift but survives them by seven years will not be charged inheritance tax on its value on death.

For CGT purposes, when an asset is gifted, this is treated as a “deemed disposal” meaning that even though no money has exchanged, the market value of the asset will replace sale proceeds.

Accordingly, the CGT allowance is a valuable relief. The allowance at its current level is worth up to £3,444 in cash terms. Once fully reduced, it will be worth a maximum of £840. This reduction greatly diminishes the value of the allowance as an effective planning tool.

So, what should you do?

If you were already thinking of making some gifts, it is worth giving some serious thought to doing so ahead of the reduction in the allowance to maximise tax relief.

As each person has their own annual exemption and transfers between spouses are generally tax-free of CGT, the benefit can be doubled.

Married couples tax planning

Consider a rental property worth £300,00, purchased for £150,000, owned in the sole name of a spouse. If the spouse gifted his half of the property to his wife and together they gifted the whole property to their son, they would remove the £300,000 from their estates, saving up to £120,000 in inheritance tax (assuming they survive seven years).

If the gift took place on or before 5 April 2023, the capital gain of £150,000 is reduced by the two annual exemptions, which means they will have a total CGT allowance of £24,600. At the 40% band, this represents a tax relief of £9,840.

As each person has their own annual exemption and transfers between spouses are generally tax-free of CGT, the benefit can be doubled

If they took this same action in May 2024, the annual exemptions would reduce and their maximum CGT allowance would be £6,000 between the two. This is a loss of £18,600 tax relief, which at 40% tax band means extra tax payable of £7,440!

The CGT annual tax exemption is a valuable tax relief, and used carefully in the right manner, could help you save significant amounts of tax by being pro-active.

If you are affected by any of the issues above and would like more information, please call 0114 272 4984 or email info@shipleystax.com.

Please note that Shipleys Tax do not give free advice by email or telephone.