Were you aware that the capital gains tax allowance fell by more than 50% at the start of the current tax year, from £12,400 to £6,000?
If you weren’t, don’t get too comfortable, because it’s being cut by a further 50% in April 2024, to £3,000.
These changes were announced in the 2022 autumn statement, and since then investors have been busy looking into options around managing these new changes so their impact on gains isn’t too severe.
What does this mean for investors?
It means that a larger portion of any gain you realise on the sale of an asset must be paid as capital gains tax, and that overall, capital gains will be less profitable.
Investors who expect significant capital gains tax liability are increasingly looking for tax efficient investment options that offer reliefs around this specific tax.
How much is capital gains tax?
The amount of capital gains tax you will pay depends on which income tax band you fall into, and whether you are selling property or another type of asset.
Are there circumstances that mitigate capital gains tax?
Capital gains tax relief is available in the following circumstances:
When you sell your main home: UK residents pay no capital gains tax on the sale of their main home, providing certain conditions are met.
When you sell your business: You may be able to pay less capital gains tax when you sell (or ‘dispose of’) all or part of your business. Business asset disposal relief means you’ll pay tax at 10% on all gains on qualifying assets.
When you give business assets or shares as gifts: If business assets are given to family members or to a charity, they may be eligible for gift hold-over relief. You pay no capital gains tax on the gift, but the recipient will need to pay tax on any gain when they sell the asset.
When you make a loss on the sale of an asset: If you make a loss on the sale of an asset, you may be able to offset that loss against any other gains you have made in the same tax year. If you have no other gains, you may be able to offset the loss against a gain that arises in the next tax year.
What can I do to reduce my capital gains tax bill?
Investing in UK startups through established schemes like EIS and SEIS or a VCT gives investors access to a selection of tax reliefs, several of which relate directly to capital gains tax.
EIS & SEIS, (The Enterprise Investment and Seed Enterprise Investment Schemes)
What is it? These schemes give investors a selection of tax reliefs to incentivise high risk investments in early stage companies.
How does it affect capital gains tax?
If you hold shares that qualify for EIS, you can claim capital gains tax deferral relief on an amount equal to the amount you have invested in EIS. This means that if you invest an amount in EIS equal to the gain you have realised, you can defer the entire gain for as long as you hold your EIS shares.
Capital gains tax deferral relief claims can be applied one year before, or up to three years after, the date the gain arose.
Once EIS shares have been held for three years, and provided a claim for income tax relief has been made, any gains that are realised on their disposal are not subject to capital gains tax.
Investors in SEIS are able to receive a 50% exemption from capital gains tax on a given gain if they invest an amount equal to the gain in SEIS shares.
VCT (Venture Capital Trusts)
What is it? Venture Capital Trusts are publicly traded vehicles that invest in private companies. Investors in the trust receive dividends when the value of their holding increases, and a range of tax reliefs.
How does it affect capital gains tax?
Shares held in a VCT are exempt from capital gains tax, if they are disposed of at a profit.
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