The Capital Gains Tax (CGT) annual exemption for individuals, personal representatives and trusts is to change from 6th April 2023. We thought it would be useful to summarise the changes as they may influence tax planning opportunities in advance of the end of the tax year.
CGT is charged on gains arising from the sale of chargeable assets in excess of the annual exemption, currently £12,300 per year for individuals and personal representatives and £6,150 for most trustees. Gains are calculated broadly as sales proceeds less the price paid for an asset. The majority of gains arising for individuals and trustees come from the sale of property or land or from share sales however certain assets are exempt such as motor vehicles and assets held in ISA’s.
For capital gains in excess of the annual exemption, CGT is generally reported on a tax return relating to the tax year the sale occurred in and the tax is payable on 31st January following the end of the tax year i.e. a disposal made on 15th May 2023 would be reported on a tax return for 2023/24 and the tax would be due for payment on 31st January 2025.
For CGT arising on the disposal of a UK residential property however a special CGT return is required and must be filed within 60 days of completion. The CGT is also due for payment in the 60 day time frame as well.
There is a long-standing requirement to report disposals where proceeds exceed four times the amount of the annual exemption even if a taxable gain does not arise. Currently for individuals, trustees and personal representatives this means that if total proceeds exceed £49,200 (4 x £12,300), the disposals must be declared on a tax return.
From 6th April 2023, the annual exemption of £12,300 for individuals and personal representatives will be reduced to £6,000. A further reduction to £3,000 comes into place from 6th April 2024. For trustees the annual exemption will be reduced to £3,000 for 2023/24 and a further reduction to £1,500 comes in for 2024/25.
There is also a proposed change from 6th April 2023 to the reporting threshold. For individuals, personal representatives and trustees this will no longer be linked to the annual exemption and will instead be fixed at a £50,000 flat rate.
With the reduced annual exemption, it is anticipated that many more taxpayers will find themselves with CGT to pay on disposals as well as reporting gains where total proceeds exceed the reporting threshold.
It important therefore that taxpayers keep a close eye on capital gains arising from any disposals they make to ensure they are below the annual exemption or are at the very least aware of the potential liability and any reporting requirements.
If a taxpayer has assets they were planning to sell after 6 April 2023 with the £12,300 exemption in mind, it may be possible to bring forward the disposal to utilise the 2022/23 annual exemption before the reduction.
Of course, each individual and trustees will have their own personal circumstances and therefore it would be prudent to carry out any year-end tax review now. As the government announced a further reduction in the annual exemption for 2024/25, it does not seem as though this is a short-term plan and instead, at least for the foreseeable future, taxpayers should adjust to the fact that CGT will affect many more individuals than previously and more individuals may have to file tax returns than under the current rules.