Capital Gains Tax: 5 Things To Consider Before Investing, By Aaron Damiano Sparkes, Founder And Managing Director, Whisky 1901

Recent changes to Capital Gains Tax (CGT) in the UK Chancellor’s spring budget came as a blow to many UK investors and entrepreneurs alike. Chancellor Jeremy Hunt reduced the tax-free allowance from £12,300 to £6,000 in April 2023 under the Autumn Statement in 2022, and his most recent announcement saw the level at which people start paying tax on realised profits slashed again, from £6,000 to £3,000 from April this year. Essentially, this means more people will have to pay tax on their investment profits.

With that in mind, below are five tips for savvy investors to consider when it comes to legally avoiding or reducing CGT.

Consider investments that are exempt from CGT

In recent years, many investors have turned to alternative tax-free investment opportunities, such as Enterprise Investment Schemes (EIS) — any gains made on investments in EIS are free from CGT if held for three or more years; ISAs; and certain collectibles, which are all exempt from CGT.

While investors may need to pay CGT on returns made from selling items such as jewellery, paintings, and antiques, they shouldn’t pay it on their car, for example, or anything with a limited lifespan unless they’ve used either for business.

Profits on certain collectibles, or “chattels”, may be tax free. For example, items with a predictable life of less than 50 years, known as “wasting assets” or “wasting chattels”, are usually CGT-free. These include whisky, wine, antique clocks, and vintage cars.

Check whether investment will be CGT-free for its lifespan

Many investments are only CGT-free under specific circumstances. For example, for whisky cask investors, once the product is removed from the barrel for bottling it is subject to taxes, including VAT and alcohol duty, as well as CGT. But, if an investor keeps their whisky in its cask for the entirety of their investment journey, they are not liable to pay CGT even after it has been sold, resulting in tax-free profit.

Use full CGT allowance each year

Everyone has an annual exempt amount (AEA), which enables them to make tax-free gains of up to £3,000 in the 2024/25 tax year. Take advantage of this as the allowance does not carry forward into the next tax year. Even though this is less generous than it has been in the past, making full use of it each year could reduce the risk of incurring a significant CGT liability in the future. This may be challenging where the gain is more than the AEA, for example with high value assets such as property, but it should be possible with an investment portfolio that can be sold gradually over several tax years.

‌Account for any CGT investment losses when selling assets

Investors might be able to minimise CGT liability by using losses to reduce their gain. Gains and losses realised in the same tax year can be offset against each other, which can reduce the amount of gain that is subject to tax. Unused losses from previous years can be brought forward, provided they are reported to HMRC within four years from the end of the tax year in which the asset was disposed of. Other costs such as auction charges or sales commissions, for example, can be deducted from gains.

‌Considering gifting to a spouse, civil partner or even a charity

Another easy way to avoid or reduce CGT is to gift the asset to a spouse or civil partner — known as an ‘inter-spouse’ transfer. This means both investors can utilise their individual allowance, effectively doubling their annual exempt amount. Where CGT can’t be avoided, gifting can still be helpful if one spouse or civil partner is in a lower tax bracket than the other. For example, higher rate taxpayers pay CGT at a rate of 28% on property and 20% on all other assets, while basic rate taxpayers only pay 18% and 10% respectively.

‌The other option is to donate to charity. If an investor gives an asset to charity, no CGT will be payable on the gains.

‌Disclaimer: Whisky cask investments are unregulated in the UK. The value of investments is variable and can go down as well as up. An investor may get back less than the amount invested. Information on past performance, where given, is not necessarily a guide to future performance. The capital invested can fluctuate and the price of casks can go down as well as up and is not guaranteed. The investments and services offered by us may not be suitable for all investors. This is not tax advice and investors should still seek professional advice regarding any tax-related investments.