The recent increase in the rates of capital gains tax (CGT) means it’s more important than ever to consider ways to reduce your CGT exposure.

Chancellor Rachel Reeves announced the increase in her Autumn Budget in October. The lower rate of CGT has now risen from 10% to 18% and the higher rate of CGT has risen from 20% to 24%¹. 

CGT is a tax on the profit you make when selling certain assets that have risen in value. This includes investments like individual shares and certain types of bonds² (other than UK government bonds, which are exempt from CGT). You don’t pay CGT on profits that fall within your annual CGT allowance, which is currently £3,000.

There are ways that investors can reduce or even eliminate their CGT exposure, which we explore below. However, CGT is a complex subject, so we’d suggest speaking to a tax adviser if you’re unsure.

Make maximum use of tax-efficient wrappers

The simplest way to limit your CGT exposure is to make the most of your individual savings account (ISA) allowance. Alternatively, if you’re happy to lock in money until your retirement³, you could consider saving more money in pensions, such as a self-invested personal pension (SIPP).

This is because both ISAs and pensions protect your investments from CGT (as well as other types of tax).

It never ceases to amaze me how many investors make insufficient use of ISAs . Some don’t realise that the current ISA allowance is £20,000 a year⁴ and that capital gains are tax-free on all ISA investments, no matter how big they may get over time.

Others simply don’t get round to it.

But I also see diligent investors with ISA portfolios of £500,000 or more, who have effectively removed all concerns about CGT by planning ahead.

Bed and ISA, bed and pension

Don’t think you’ve missed the boat if your investments aren’t already organised within ISAs or pensions, because you can still do something about your potential future CGT liabilities.

You can top up your ISA with the proceeds from the sale of your existing investments rather than with new money in a two-step operation known as ‘bed and ISA’. This involves selling holdings in your general account and then buying back the same holdings within your ISA. You effectively end up with the same portfolio as before, but your investments are housed in a more tax-efficient account.

Although the initial sale would be subject to your annual CGT allowance, funding your unused ISA allowance with this money will subsequently mean your investments are moved to a more tax-advantageous position. Find out more about bed and ISA with Vanguard.

It’s also possible to move existing investments to a pension through a similar process known as ‘bed and pension’. You sell holdings in your general account and then buy back the same holdings within your pension.

With Vanguard, you’ll need to sell holdings in your general account, transfer the proceeds to your bank account, and then use the cash to make a pension contribution. This means the process will take a little longer than with bed and ISA. Make sure you have a verified bank account linked to your Vanguard account for us to make the payment.

If you top up your pension with the proceeds, you may even earn tax relief on this money as it will count as a personal pension contribution. Most people can get tax relief on contributions of up to 100% of gross relevant earnings, capped at £60,000⁵.

Beware that the more you trade, the harder it can be to work out the gain or loss on sales of your investments. You may wish to consult a tax expert.

Take profits sooner rather than later?

In general, the annual CGT allowance is a ‘use it or lose it’ allowance, which means you can’t carry any part of it into subsequent tax years.

So, you may want to consider making full use of the current £3,000 allowance, while you still can.

If you want to sell an investment but the gain would exceed your CGT allowance, you could consider selling the investment gradually over a number of tax years. For example, you could sell part of the investment at the end of the tax year on 5 April and the rest at the start of the next tax year on 6 April. This can help to spread out when tax is payable and may mean you stay within the CGT allowance. However, you’ll need to calculate your likely profits for each transaction very carefully, so you don’t inadvertently breach the allowance. A tax adviser can help with this.

Make the most of your losses

Don’t let losses go to waste either. No one wants to lose money, but if you do make a loss you could use it to your advantage when filing your annual tax return. When you report a loss to HMRC, the loss is deducted from the gains you made in the same tax year. This effectively reduces your overall gain, which can help to lower your CGT liability.

So, if you make a loss one year, think ahead to the following tax year. You can find out more about reporting losses on the HMRC website.

You can claim losses up to four years after the end of the tax year in which you sold the investment.

Keep it in the family

Transfers between spouses and civil partners are usually tax-free, which means you have the option to work as a couple to better manage your CGT liabilities.

Transferring investments to a spouse or civil partner can help to bring down a CGT bill if they are in a lower tax bracket, don’t work or haven’t fully used their CGT allowance⁶.

Every individual has their own allowance, which means that each married couple in 2024-25 has the potential to realise tax-free capital gains worth up to £6,000.

Manage your taxable income levels

The rate at which you pay CGT is dependent on your income tax band, so reducing your taxable income can have a knock-on benefit when it comes to paying any CGT you owe.

One way to reduce your taxable income is to contribute more to your pension. Higher-rate income tax kicks in once your income exceeds £50,270. So, if your income is £60,270, you’d pay 40% tax on the £10,000 of income that falls within the higher-rate tax band. But if you made a £10,000 pension contribution (£8,000 plus £2,000 tax relief) to a SIPP, your ‘adjusted net income'⁷ would fall to £50,270, which is in the basic-rate tax band. The tax relief would be obtained through an extension of your basic-rate tax band, which can be done by filling in a tax return.

Invest in shares and bonds through funds

It’s also important to note that investing through well-diversified funds, such as Vanguard’s straightforward and low-cost range, rather than individual shares and bonds⁸, can also limit your CGT exposure.

This is because investors don’t pay CGT on any of the capital gains that a fund might make when it buys and sells its underlying holdings of different shares and bonds.

It’s only if and when you sell your investment in a fund at a profit – assuming you haven’t done so inside a tax-efficient wrapper such as an ISA or SIPP – that having to pay CGT becomes a possibility.

And don’t pay twice

A final thing to bear in mind is that capital gains are wiped out on death. Your estate may have to pay inheritance tax when you die, so incurring CGT by selling assets later in life could effectively mean paying tax on the same asset twice. If in doubt, contact your financial adviser.

You can’t choose whether to pay CGT or not. With careful planning, though, you can reduce your potential bill by making the best use of the available reliefs and allowances.

¹ For more information on CGT rates see HMRC’s website.

² Bonds are a type of loan issued by governments or companies, which typically pay a fixed amount of interest and return the capital at the end of the term.

³ The earliest you can access your private pension money is age 55, rising to 57 from 6 April 2028.

⁴ Tax year 2024-25.

⁵ For more on what counts as ‘relevant earnings’ that can earn tax relief when used to fund a pension, see the HMRC Pensions Tax Manual. Your annual allowance might be lower than £60,000 if you have a high income or you’ve already flexibly accessed your pension pot. To work out if you have a reduced (tapered) annual allowance, see HMRC’s website. If you’ve flexibly accessed your pension, you can work out what your alternative annual allowance is here.

⁶ Capital gains tax, civil partners and spouses, HMRC. Updated April 2024.

⁷ Adjusted net income is total taxable income before any personal allowances and after certain tax reliefs. To work out your adjusted net income, see HMRC’s website.

⁸ Except for bonds issued by the UK government, which do not incur CGT. View full list.