What is Capital Gains Tax, and why might you start paying it as you approach retirement?

By Chancellor

Capital Gains Tax (CGT) is a form of tax paid on profits made on the sale of some assets. Assets that could be liable to the tax include:

  • Belongings worth more than £6,000, apart from your car
  • Properties that are not your main home, unless your home is very large, has been used for business, or has been rented out
  • Non-ISA investments
  • Business assets.

Unfortunately, the latest data suggests that CGT receipts are rising.  According to Investors’ Chronicle, CGT receipts have risen by:

  • 18.3% in the year to July 2023
  • 83.7% on a three-year basis
  • 359.7% in the last decade.

Keep reading to find out why your CGT bill could rise as you head towards retirement, and how we can help you manage your tax liability.


The CGT annual exempt amount has reduced in 2023 and will decrease again in 2024

Before CGT is due on any profits you earn, there is an “annual exempt amount” that each individual person benefits from. If your profits fall within the CGT annual exempt amount, you won’t pay tax on the sale of that asset.

Importantly, assets held within a trust are still liable for CGT, and the annual exempt amount is usually lower for trustees.

The below table shows how the CGT annual exempt amount had been frozen for four years before decreasing in April 2023.

Source: HMRC

In addition to the freezes and reductions the government has already implemented, the CGT annual exempt amount is set to be reduced to £3,000 (or £1,500 for trustees) in April 2024.

This means that the annual exempt amount will have been squeezed from £12,300 to just £3,000 in only two years, inevitably increasing the amount of CGT many people may pay. This could be one of the reasons that CGT receipts have increased by more than 300% in the last 10 years.

It’s important to remember that the CGT annual exempt amount is a “use it or lose it” allowance, so you can’t carry forward unused amounts from previous years. That said, the annual exempt amount does apply to individuals, so you and your spouse may be able to combine the amount on the sale of shared assets.

All in all, though, it is crucial to be aware of how your CGT bill could rise in light of recent reductions, especially as you head into retirement.


2 common ways you could incur a CGT bill as you approach retirement

Although CGT is payable on the sale of various assets, there are two often-overlooked ways that you could incur a CGT bill as you approach retirement.

1. Cashing in shares to boost your later-life income

When you retire, you are likely to draw your later-life income from a variety of sources, including any private pensions you hold, and the State Pension.

On top of this, you may wish to cash in investments you’ve held for a number of years in order to supplement your income – and doing so may attract a CGT bill.

Remember: CGT is generally incurred on profits yielded from non-ISA shares, and you’ll only pay this tax if those profits exceed the annual exempt amount in that tax year.

Plus, you may be able to offset capital gains against capital losses.

It can be challenging to work out your overall gains against your losses, and if you’re worried about doing so alone, your financial adviser can help.

Despite the various reliefs and exceptions mentioned above, if you cashed in a large portion of your investment portfolio at once, it could be that your profits surpass the annual exempt amount in that year. In this case, it may be prudent to prepare for a CGT bill you expect to incur ahead of retirement.

2. Selling a property that is not your main home

If you own properties other than your main home, you could be considering using profits from a sale to help fund your retirement.

While doing so could bolster your financial security later in life, it’s important to be aware that you may pay CGT on profits that exceed the annual exempt amount when you sell a property that isn’t your home.

You may pay CGT on the sale of:

  • Buy-to-let properties
  • Business premises
  • Your second home, such as a holiday home or city pad.

What’s more, the rate of CGT is usually higher on properties than other assets.

If you’re a basic-rate taxpayer, the rate of CGT you pay depends on your taxable income, the size of the gain you make, and other factors.

For higher- and additional-rate taxpayers, CGT rates are usually set at 20%, and 28% for property.

So, while it could still be advantageous to make these sales to help cover costs in retirement, it’s important to calculate how much CGT you might need to pay when you do.


Consulting a financial adviser can help you calculate the amount of CGT you may pay

Figuring out how much CGT you might owe on the sale of an asset can be complex. Fortunately, working with an experienced financial adviser can offer the peace of mind you need to proceed with confidence.

Email info@chancellorfinancial.co.uk, or call 01204 526 846 to speak to an adviser.

If you’re already a client here at Chancellor, contact your personal financial adviser to discuss any of the content you’ve read in this article.


Please note

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

All contents are based on our understanding of HMRC legislation, which is subject to change.

The Financial Conduct Authority does not regulate estate tax planning or trusts.