Increasing your tax-free capital gains

CGT annual exemption

Every person is entitled to the annual exempt amount for capital gains tax (CGT). For 2022/23, £12,300 of any chargeable capital gains you make are tax free. If the gain is greater than this, the excess is liable to CGT at between 10% and 28%, depending on the asset type, and your level of income. However, there are legitimate ways to increase the exempt amount.

Spouse or civil partner exemption

If your gains for a year (after knocking off any losses of the same year or unused ones for previous years) already exceed your CGT annual exemption and you wish to make another transaction which would result in a gain, it’s possible to make use of your spouse or civil partner.

Transfer the assets you want to sell to your spouse/partner so they can make the sale. Special rules treat the transaction as resulting in neither a gain nor a loss. In effect, your spouse receives them at the same price you paid for them. This means when they sell the assets they’ll make the same gain that you would have. The important difference is they can use their annual exemption to reduce their CGT bill.

This advice is only for married couples and civil partners as transferring assets to unmarried partners triggers an anti-avoidance rule. This treats the transaction as if you had sold the assets to them at their full value, meaning you’ll be taxed on the gain you were trying to mitigate.

CGT planning

It is possible to make use of your unmarried partner’s CGT exemption with long-term planning. It involves transferring assets you hope will increase in value and when they do your partner sells and uses their exemption to reduce the CGT. They can if they wish give some of the proceeds to you without breaching anti-avoidance rules. A similar tax-saving strategy can be used more easily and possibly to greater effect if you have children.

Tax planning for youngsters

Surprisingly, children are entitled to their own CGT annual exemption from birth. While there are many anti-avoidance rules to stop you diverting assets and income to your youngsters to avoid tax, these don’t apply to the CGT exemption.

Give assets, e.g. shares, to your children at a young an age as possible and certainly before they reach 18 as the tax-saving scheme ceases to work after that. While you’ll have to pay tax on any income, dividends, etc., from these, any capital gain made when the assets are sold is taxed on them but only if it exceeds their annual exemption at the time.

Spending the proceeds. It’s important to remember that any gift of assets to children must be genuine and not a sham merely to dodge tax. This doesn’t prevent you from selling assets to use your children’s CGT exemptions and then spending the proceeds on their welfare or education, e.g. school fees.