Capital gains tax annual exempt amount

The tax system contains various allowances which enable individuals to use income and gain tax-free. The allowance we will be talking about in this blog is the annual exempt amount that applies for capital gains tax purposes. For the year 2021-2022, it was £12,300 and will be set at this level for the upcoming year of 2022-2023.

How does the capital tax gain annual exempt work?

This allowance helps each individual to realise net gains of up to £12,300 in the upcoming tax year before any capital gains tax is payable. Spouses or civil partners each have a separate annual exempt amount. If the annual exempt amount is not used in the tax year, the amount is lost as the exempt amount can’t be carried forward.

This exempt amount is applied for the next year to net gains that is chargeable gains less allowable losses. Therefore, while losses for the tax year must be set against gains for the tax year before applying the annual exempt amount, there is no requirement to use up losses brought forward before utilising the annual exempt amount.

Tax planning opportunities

The 2022-2023 tax year came to an end on 5 April 2023. The final months of the tax year are a time when it is necessary to review your tax position and consider whether you need to take any action before the tax year comes to an end in April. 

Regarding the capital gains tax, it’s a good idea to review disposals made so far in the tax year and the resulting net gains/losses, as well as any planned disposals. If the annual exemption has not been fully used, and disposal is on the cards which may yield a chargeable gain, consideration could be given to realising the gain in the upcoming year. This will enable you to take advantage of the annual exempt amount for the year, leaving the upcoming annual exempt amount available to shelter the first £12,300 of gains realised in that year.

However, if disposal planned before the end of the tax year will realise a loss and when set against gains for the tax year, will result in some or all of the annual exempt amount being wasted, consideration could be given to delaying the disposal until the next year. This will prevent wasting this year’s annual exempt amount and leave loss available to reduce any upcoming year gains.

As mentioned before, spouses and civil partners have their exempt amounts each year and they can transfer assets between them at a value that gives rise to neither a gain nor a loss opening further tax planning opportunities to ensure that the annual exempt amount is not wasted. If one spouse or civil partner has used their annual exempt amount, but their partner’s exempt is still available, then transferring the assets (or a sufficient share to use up the available annual exempt amount) before the sale will ensure that use is made of the available annual exempt amount. Also, if both partners have used their annual exempt amounts and the likely gain exceeds £12,300, then transferring a share in the asset to their partner prior to sale will enable both annual exempt amounts to be used.

Example

Tom and Lucy are married. In 2021-2022, Lucy sold some shares realising a gain of £13,000. This means that she used her annual exempt amount in full. However, Tom has made no disposals in that year. Lucy plans to sell some more shares which she expects will realise a gain of £11,000. 

She was planning on waiting until after 5 April 2022 to make the disposal. However, if she transfers those shares to Tom before the sale, and if Tom sells them before 6 April 2022, the gain falls in the 2021-2022 tax year. Also, it will be sheltered by Tom’s annual exempt amount for 2021-2022, meaning his annual exempt amount was not wasted whilst leaving Lucy’s annual amount for upcoming 2022-2023 available to set against any other gains in that tax year.