Have you got a CGT problem brewing?

If you don’t have any need or desire to sell an investment, it’s easy to forget about capital gains tax (CGT). But leaving your investments to do their work, without giving any attention to the tax, could land you with a surprisingly large bill and take the shine off your returns, when you do eventually come to sell.

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CGT is becoming an increasingly painful tax for investors – it’s not the preserve of the super-wealthy and, over the years, even those who invested modest sums could get caught out.

The changing picture for capital gains

In the last few years, the annual exempt amount – your tax-free capital gains allowance – has shrunk from £12,300 in 2022-23 to £6,000 in 2023-24 before falling to its current level of £3,000 the following year.

In the most recent Autumn Budget, Chancellor Rachel Reeves also increased the rates of CGT. The lower rate (paid by those who remain basic rate taxpayers once their gain is taken into account) increased from 10% to 18% and the higher rate (paid by higher and additional rate taxpayers) rose from 20% to 24%.

The good news though, is that there are plenty of ways to (legally) avoid paying CGT – if you know how.

Use your tax wrappers

It’s important to stress that – when it comes to CGT and investments – you only need to worry about money held in general investment or trading accounts.

Any money invested in pensions or stocks and shares ISAs will be sheltered from tax – with no tax to pay on dividends or capital gains.

That means it really makes sense to make the most of your allowances.

Each year you can invest 100% of your earnings (up to £60,000) in pensions and up to £20,000 into ISAs.

With an ISA you won’t lose access to your money and there will be no tax on growth or withdrawals. But if you can afford to tie up your cash until age 55 at the earliest (57 from 2028) investing in a pension could be a particularly savvy move.

That’s because, in addition, to sheltering any growth tax, you’ll also get tax relief on contributions at your marginal rate - the rate of tax you pay on the next pound you earn. And although withdrawals will be taxable, you can take 25% of your eventual pot tax-free.

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However, even if you have got money invested in trading accounts that aren’t sheltered from tax, there are still way to mitigate – or at the very least reduce – your tax bill, if you plan ahead.

Here are a few tactics you might want to consider.

• Use your CGT allowance every year

The annual allowance for CGT works on a ‘use it, or lose it’ basis.

Let’s say you bought £10,000 of shares 20 years ago, which are being held in a trading account – they’ve done pretty well and are currently worth £22,000. Happy with your gain and with a few expenses on the horizon you decide to sell them.

However, as your £12,000 gain exceeds the £3,000 tax-free allowance for the year, you’ll need to pay CGT on a total of £9,000.

If you pay CGT at the lower rate, that would land you with a £1,620 tax bill, or £2,160 if you pay the higher rate.

However, if you had planned ahead and regularly sold shares to use your annual exemption, you could have got the benefit of the tax-free allowance multiple times, not just in the year you sold, reducing your tax bill or potentially avoiding it altogether.

Each year that you use the current £3,000 exemption a higher-rate taxpayer can cut their CGT bill by £720, while a basic rate taxpayer would net £540.

When you sell shares to make use of your exemption, you don’t have to exit the market.

Although the 30-day rule means you can’t immediately rebuy the same investments, you can reinvest your gains in an equivalent or similar holding. Alternatively, you could – very sensibly – use it as an opportunity to invest elsewhere, rebalancing your portfolio or adding some diversification.

If you bought your holding in one go, it’s easy to check your gains – it’s just a case of calculating the growth of your investment (less your costs).

However, it’s more fiddly if you’ve been drip-feeding money into your investments over the years. Instead you’ll need to calculate the average of cost of acquiring those shares or units by totting up your total purchase costs and dividing it by the size of your holding. Once you know the average cost of each share, you can then deduct it from the share price on the date of the sale to calculate your gains.

• Consider Bed & ISA

Another option – if you have any remaining ISA allowance for the year – is to take advantage of Bed & ISA rules. This process allows you to get around the 30-day rule and sell shares in a general investment account (GIA) and buy them back immediately in your stocks and shares ISA (or a child’s stocks and shares junior ISA if you’re feeling generous or have exhausted your own ISA allowance).

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This allows you to realise gains in a taxable environment and pay them into an account where they will be protected from tax going forward. You just need to be careful that you don’t sell enough shares to trigger a capital gain when you start the process – but if there’s a larger taxable gain to shift, you can consider straddling moves over a number of tax years (at the end of this tax year and the start of next, for example).

If you’ve got a trading account and an ISA on the same platform, it shouldn’t take too long to complete the process. However, it’s become a popular process in the wake of the reduction to the annual exempt amount.

• Join forces with your spouse

If you’re married (or in a civil partnership), joining forces and planning your finances together can save you a considerable amount of tax.

That’s because the transfer of capital between spouses is tax free, so by spreading wealth between you, you’ll be able to take advantage of both of your annual allowances, reducing the tax you need to pay or potentially getting you out of paying any tax at all.

Where paying CGT is unavoidable, there could still be savings to be made by transferring assets to your spouse, if they will pay a lower rate than you.

You just need to be mindful that when you do this, your spouse will become the legal owner of the asset.

• Don’t forget your losses

Investors don’t always enjoy gains – from time to time you may find yourself facing a loss when you sell your investment.

No investor likes a loss, but a silver lining is that you can offset it against any gains to reduce the total amount of CGT that you might need to pay. Losses and gains from the same tax year need to be offset against each other. However, it is possible to carry forward any unused losses from previous years – you just need to make sure that the loss is reported to HMRC within four years of the sale.