The capital gains tax surprises that catch people out

At a glance

• Unexpected CGT bills are becoming more common, partly because the annual CGT exemption has fallen in recent years.
• To help avoid future surprises, keep records of purchases, sales and gifts of assets. This will make calculating any gains much easier.
• If you receive an unexpected CGT bill, take time to understand what triggered it, check the figures carefully and put a plan in place to pay it.
  
  

The run-up to a Budget often prompts people to think about tax and their finances. While future tax policy remains uncertain, understanding the rules that apply today can help avoid costly surprises. Capital gains tax (CGT) is one area where unexpected bills can arise, particularly as allowances have reduced in recent years. As a result, more people may find themselves facing a CGT bill when selling or gifting assets.

If you’ve received a CGT bill you weren’t expecting, don’t panic. Understanding why it has arisen is the first step towards dealing with it and reducing the chances of it happening again.

When might a CGT bill arise?

When you sell an asset – a second home, land, some stocks and shares, certain possessions – you may have to pay CGT on the profits you’ve made.

For example, if you purchased an artwork for £10,000 and later sold it for £15,000, you may have to pay CGT on the £5,000 gain.

While you generally only have to pay CGT on gains above your tax-free exemption, this has fallen sharply in recent years. As a result, many people may be caught off guard when selling valuable assets.

In the 2022/23 tax year, the CGT exemption stood at £12,300. It was reduced to £6,000 in 2023/24.

The following tax year it was further cut, to its current level of £3,000. It applies to individuals and assets held in trust if the beneficiary is vulnerable. For assets held in most trusts, the exemption is generally £1,500.

Spouses and civil partners living together can both use their £3,000 allowance to create a £6,000 gain for jointly held assets.

Where CGT is payable, a rate of 18% applies for taxable gains falling in the basic rate income tax band. In other words, if your combined income and any gains made are within the basic rate threshold of £50,270. Higher and additional rate taxpayers face CGT of 24% for any gains above the £3,000 threshold.

Any gains realised in your pension or individual savings account (ISA) are not subject to CGT.

It is worth nothing that these tax rules can change at any time and are generally dependent on individual circumstances.

Because many assets have appreciated in value over recent years, it’s perhaps not surprising that some people have been caught out when selling some of their assets, investments or second properties.

But that is not the only reason people receive a surprise CGT bill. Many people don’t realise that when they make a gift of an asset, if it has risen in value since first bought then they may personally be liable for CGT on the gains.

Niki Patel, tax and trust specialist at St. James's Place, says: “In HMRC’s eyes, gifting an asset is usually treated as a disposal for tax purposes. Therefore, if you gift a valuable asset to someone, you may also have to pay CGT.

“Put simply, if your gift is worth more than it was when you first paid for it, it’s important to check whether that could trigger a CGT liability.”

What to do if an unexpected bill arrives

Receiving a CGT bill you weren’t expecting can feel unsettling. But it’s important not to ignore it. Taking action early can help avoid additional penalties or interest.

Start by checking how the gain has been calculated and ensure all the figures are accurate. Gather all the paperwork you can find about the asset, including purchase details, sale documents, valuations and anything related to associated costs.

If anything looks unclear, seek professional advice. We can help you understand how the liability arose, assess all available reliefs and exemptions, as well as consider the wider impact of this bill on your finances.

We can also help you work out the most suitable way to fund the bill, whether that’s through available cash reserves, existing investments or another source of funds.

Preventing surprise bills

The best way to prevent unexpected CGT liabilities, or to identify them in advance, is to keep accurate records. HMRC may ask you to provide evidence of how your gains were calculated.

Whenever you buy an asset you may sell in the future, record any evidence of the fees and costs of the purchase, as well as its sale. Doing so can make calculating any future gains much more straightforward.

Similarly, it’s worth keeping records of gifted assets and inherited assets.

If you’re considering making a gift, understanding the asset’s value and potential gain before transferring ownership can help prevent unexpected tax consequences.

Managing your CGT position

As the CGT exemption has reduced and assets values have risen, planning has become increasingly important.

Here are some ways to help manage your CGT position:

• Use tax-efficient wrappers: ISAs and pensions offer valuable tax advantages and can help shelter your investment from CGT.
• Consider the timing of disposals: Because your annual exempt amount renews every tax year, spreading disposals over multiple tax years may help reduce the overall tax payable.
• Take a holistic approach: CGT planning is often most effective when considered alongside your wider financial goals and tax position.
• Think before you sell or gift: Taking time to understand the tax implications before selling or gifting can help avoid surprise bills in the future.
• Seek advice: Tax planning can be complex. We can help you understand your circumstances, assess potential liabilities and build a strategy that supports your wider financial objectives.

Niki adds: “If you get a CGT bill you weren’t expecting, take some time to understand what triggered it so that it doesn’t happen again. Keep good records of what you’ve bought, sold or gifted – as that can make a big difference down the line.

“CGT planning works best when considered as part of a wider financial plan. We can help you understand your options and help you make the most of available exemptions and allowances.”

An unexpected CGT bill is never pleasant. But understanding why it arose, dealing with it promptly and planning ahead, you can reduce the risk of similar surprises in the future and feel more in control of your finances.