Capital Gains in excess of the Annual Exempt Amount

Author Image Neil MacLeod Technical Specialist
2 minutes read
Last updated on 24th Dec 2019

The capital gains tax Annual Exempt Amount is the amount of capital gains that can be crystallised in the tax year which are exempt from CGT.

The Annual Exempt Amount for the 2019/20 tax year is £12,000 per person. It’s important to note that any unused amount cannot be carried forward to future tax years, so it’s important to use it each tax year or it will be lost.

Ideally all your gains would be covered by your exemption, but what can you do if you have, or intend to crystallise, gains in excess of the exempt amount?

Disposals between spouses and civil partners

A transfer of an asset between spouses or civil partners will be at no gain/no loss if they are living together.

A married couple or civil partners are treated as living together unless:

  • They are separated under an order of a court, or
  • They are separated by a formal Deed of Separation executed under seal (except in Scotland where the deed should be witnessed), or
  • They are in fact separated in such circumstances that the separation is likely to be permanent

The recipient of the gift will ‘inherit’ the first spouse’s acquisition cost for the purposes of calculating gains in future, so the gain does not disappear, but it does mean assets can be passed from one spouse to another to enable both to utilise their annual exemption.

Pension contribution

If you are going to pay tax on capital gains in excess of the exempt amount, then making a pension contribution can also be used to soften the blow.

Capital gains in excess of the annual exempt amount are added to the individual’s other taxable income for the year and subject to tax at 10%/18%* where they fall within basic rate tax, or 20%/28%* where they sit within higher or additional rate.

In addition to the valuable tax relief obtained by investing in a pension, contributions can also be used to reduce the rate at which tax is payable on chargeable gains.

A pension contribution to a personal pension extends the basic rate band by the gross amount of the contribution. If you have capital gains that are going to sit within the higher rate tax band, extending the basic rate band could mean some or all of the gain is taxed at the lower CGT rate rather the higher rate.

Similarly, a gross contribution made via net pay to a company scheme, employer contributions made via salary sacrifice, or a gross contribution to a Retirement Annuity Contract, reduce net income. This could bring gains back into basic rate, lowering the tax payable.

*The higher rates of 18% and 28% apply where the gain relates to residential property.

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