Is Capital Gains Tax the lesser of two evils?

Is Capital Gains Tax the lesser of two evils?

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Martin Holden
Published: 06 Jul 2017 Updated: 13 Jun 2022

You wouldn’t be alone if you were unsure about Capital Gains Tax (CGT) rules and rates – or how to use your allowance each year. The Capital Gains Tax allowance is less well-known and less-used than the Income Tax equivalent, but with careful planning it can be a valuable tool for people taking an income from their savings and investments.

What is Capital Gains Tax and when do you pay it?

You pay Capital Gains Tax when you sell or ‘dispose of’ an asset for a profit. Disposing of an asset includes giving it away as a gift or swapping it for something else. Chargeable assets include personal possessions worth more than £6,000, investments held outside an ISA or pension, and properties aside from your main home.

You only pay Capital Gains Tax on any profits you make, not on the full value of the asset. You also get an annual allowance each year – you won’t pay CGT on any profits up to this amount.

How much is the Capital Gains Tax rate and allowance?

The CGT allowance is currently £11,300. You only pay tax on profits above this amount. You can also offset your gains with any losses you make – so you may not need to pay Capital Gains Tax if you made other losses in the same tax year or previous years.

The rate of Capital Gains Tax you pay depends on which Income Tax bracket you are in. Basic-rate taxpayers pay CGT at 10% (or 18% on residential property) and higher and additional-rate taxpayers pay CGT at 20% (or 28% on residential property).

It can be the lesser of two evils

Capital Gains Tax is therefore paid at a lower rate than Income Tax for many people. An additional-rate taxpayer who was gradually drawing down their capital as ‘income’ would pay 20% tax rather than the 45% they would pay in Income Tax. This is why some call Capital Gains Tax the lesser of two evils.

Managing a tax bill when taking an income

A lower tax rate sounds great, but using your Capital Gains Tax allowance requires careful planning. There are also several issues to consider.

For example, would you miss out on potential investment growth by drawing on your investments to cover your regular expenditure? Could you face a shortfall in later life by taking too much money along the way? These questions are difficult to answer, so it makes sense to speak to an expert adviser about them.

Speaking to an expert can help

Many people get advice from an expert about the best way to take an income from their different accounts, pensions and investments. Tilney’s financial planners can help you with:

  • Taking an income from various sources, using all of your available tax-free allowances
  • Forecasting your future finances to see how long your money will last and how much you can afford to take each year
  • Transferring assets between spouses to make use of both of their allowances
  • Using ISAs, pensions and other tax-efficient investments

The easiest way to speak to a Tilney financial planner is to book a no-obligation initial consultation. This gives you the chance to find out what we could do for you. You can meet one of our financial planners at your home or local Tilney office, or speak to them over the phone if you would prefer.


This article was previously published on Tilney prior to the launch of Evelyn Partners.