Thousands of Brits could be breaking the law after CGT changes

The capital gains tax rules changes will catch more of us in the tax net and could leave us with a nasty, unexpected tax bill, or worse.

Not only do the capital gains tax (CGT) changes mean we’ll be paying more tax, they could also leave thousands of Brits breaking the law.

That's because they don’t realise they need to declare CGT liabilities on small gains to the taxman.

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CGT changes

Chancellor Jeremy Hunt's decision yesterday to slash the CGT allowance from £12,300 to £6,000 from April 2023, and then to £3,000 from April 2024, could leave thousands of Brits breaking the law without realising.

The rules changes mean that even small gains will be taxable. From April 2023, buying some shares for £5,000 and selling them a few years later for £12,000 will trigger a gain and leave you with a tax bill.

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The CGT rules mean that you’ll need to report a gain through your tax return or by using HMRC's Capital Gains Tax Service, or you could end up breaking the law and potentially paying a penalty. If you sell a second home, you’ll need to report CGT gains even sooner, within 60 days of the sale to avoid a penalty.

If you’re late declaring a gain, then you’ll owe a penalty of £100 plus the tax due. That goes up to the higher of £300 or 5% if you’re over six months late.

Fiddly rules

Even gifting assets to an unmarried partner or children could leave you with a CGT bill. That’s because gifting assets to someone else is counted in the same way as selling them as far as the taxman is concerned. Splitting up and dividing up your assets with an unmarried partner could mean you both have a big capital gains tax bill and need to do a tax return.

When you make a gift, the gain is calculated based on the market value when you make a gift.

The rules only apply to some assets, but investments are included. This means giving shares to your kids or unmarried partner could have a nasty sting in the tail. Gifts to a married partner are usually exempt, as long as you're not separated.

Many people also don’t realise that inheriting a house could also lead to a CGT bill. The taxable gain worked out based on the amount the house was worth on death compared to when it’s sold. There’s often a time lag when people come to sell a home following a death, leaving them with a CGT bill on top of inheritance tax, or IHT.

Protecting your assets

Protecting your assets from CGT has never been more important, and using tax efficient wrappers like an ISA or pension can help you keep more of your wealth. You’re allowed to invest up to £20,000 per year in a stocks and shares ISA.

You can also sell shares and rebuy them within a stocks and shares ISA in what’s known as a “bed and ISA”. By selling shares with a gain just under the CGT allowance and rebuying them within your ISA, you can protect your assets from the taxman.

If you’re thinking of giving away investments, you could also consider giving them gradually to use up your capital gains tax allowance each year.

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It’s worth also bearing in mind the inheritance tax rules as you’re allowed to give away up to £3,000 worth of assets each year without the gift being potentially subject to IHT. For example, if you give away shares worth £10,000, your estate could end up owing inheritance tax on the gift if you die within seven years.

It's important to get advice on how to minimise your capital gains tax and inheritance tax bill as the rules are complicated and depend on your personal circumstances.