Capital Gains Tax is becoming a £30bn investor nightmare - here’s why and how to cut your bill

Frozen thresholds, inflation and increased tax rates all mean people can end up paying more without doing anything differently at all

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One thing that was clear in last month’s Budget was that the chancellor plans to rely on background tax rises to plug holes in the public finances.

Rachel Reeves may not have increased your income tax rate, but you are likely to hand more money to the taxman over the coming years.

One area where the government will make money is Capital Gains Tax (CGT). Data from Hargreaves Lansdown shows HMRC’s take will rise from £13.7bn at the start of this parliament to £30bn by 2030/31.

“The slashing of the CGT allowance has been swift and dramatic,” says Sarah Coles, head of personal finance at Hargreaves Lansdown.

“It means more people face paying more of this tax, and some people are being exposed to it for the first time,” says Coles. And it’s not the only reason this tax is set to take a bigger bite out of your profits.

What is Capital Gains Tax?

You pay CGT on profits made from selling or disposing of an asset.

The gain is taxed, not the full sale price, and you can deduct some expenses too.

Capital Gains Tax is levied on profits from the sale of second homes and buy-to-let properties, as well as investments and assets like art, antiques and jewellery if they are worth more than £6,000 each. Crypto assets are also subject to CGT.

Basic-rate income taxpayers pay CGT at 18 per cent, but that rises to 24 per cent for higher and additional rate taxpayers.

Why you will pay more CGT

The leap in CGT receipts is down to several factors. It started with the slashing of the Capital Gains Allowance – that’s the amount you can make from selling assets before tax is due. It was £12,300 in 2023 before being cut to £6,000 and is now just £3,000.

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Additionally, the main CGT rate has also risen. Back in 2023 basic-rate taxpayers paid it at 10 per cent and the higher rate was 20 per cent. This rose to 18 per cent and 24 per cent in October 2024.

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That increase in rates is even more potent when combined with frozen tax thresholds. As more people are dragged into paying the higher rate of income tax, they will also pay the higher CGT rate.

“People are also realising significant gains,” says Coles. “Landlords are continuing to sell up as the rules tighten, and investment properties bought before the pandemic boom may have delivered impressive gains.

“Meanwhile record levels of share prices mean those investing outside an ISA or pension may also have bigger CGT bills. Nobody is lamenting having made bigger gains, but they may come with the sting in the tail of higher taxes.”

All this means HMRC is set to more than double what it makes from CGT over the next five years.

How to cut your CGT bill

“For wealthy families, entrepreneurs and long-term investors, Capital Gains Tax is more than a technicality; it is a material drag on the value you work hard to create,” says Bertie Scott-Hopkins, director and chartered financial planner at EXE Capital Management.

“Fortunately, the UK tax system offers a wide range of legitimate and highly effective strategies to reduce, defer or even eliminate CGT exposure when your planning is proactive and well-structured.”

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One of the best ways to cut a CGT bill is to make the most of your tax-free allowance and use your spouse or civil partner’s too. We each can make gains of up to £3,000 per tax year without having to pay CGT.

You can transfer assets to your spouse or civil partner without attracting any tax so make sure you use both your allowances. This can also help if one of you pays income tax at a lower rate. If assets are transferred to them before sale, then you will cut the CGT rate from 24 per cent to 18 per cent if you are a higher or additional rate taxpayer.

“Thoughtful planning of sale dates, particularly between spouses, ensures more gains fall within this tax-free band,” says Scott-Hopkins.

Also, use your £20,000 ISA allowance each year. “You should shelter as much of your portfolio in ISAs as possible,” says Coles, as you won’t pay tax on gains or income. If you have investments outside an ISA, you can use the Bed and ISA process to move eligible assets into an ISA.

You can also use any losses you’ve made when selling a taxable asset to offset other gains in the same or future tax years. HMRC allows you to offset them for up to four years.

“Carrying losses forward creates a valuable buffer that can neutralise future gains and smooth long-term tax exposure,” says Scott-Hopkins.

Finally, consider deferring sales until you are in a lower tax band. “Realising gains in a year when income is lower, for example after retirement, can reduce the CGT rate significantly,” he adds. “With careful timing, this becomes one of the simplest and most effective planning tools.”

When investing, your capital is at risk and you may get back less than invested. Past performance doesn’t guarantee future results.