Reducing CGT via a relief at source pension contribution

Capital Gains Tax is payable at two rates*

Gains on capital assets (property, shares, etc.) are liable to CGT where the net value of gains and losses during the year exceed the annual exempt amount of £6,000 (reducing to £3,000 in tax year 2024/25). Losses registered from previous years can be deducted from gains where available.

Where there are gains above the annual exempt amount, CGT is payable at two rates:

1. 10%* for non and basic rate taxpayers
2. 20%* for higher and additional rate taxpayers

Where taxable gains straddle the bands, a portion is taxed at 10% and a portion at 20%.

*gains made on residential property carry a surcharge of 8% so are charged at 18% & 28% respectively.

Pension contributions extend income tax bands

Although relief at source pension contributions receive immediate tax relief of 20% within a UK registered pension scheme, higher and additional rate relief is provided by extending income tax bands. This works by extending the basic rate and higher rate band by an amount equivalent to the gross (after 20% relief at source) pension contribution.

For example, if £8,000 was paid into a relief at source scheme, £10,000 would be credited to the scheme and the basic rate band would be extended from £37,700 to £47,700 (for England, Wales and N Ireland). This allows more income to be taxed at 20% providing the additional 20% relief for higher rate taxpayers. The same concept exists for higher rate band i.e. the amount that can be earned before 45% is payable.

In addition, for high earners losing their personal allowance at a rate of £1 for every £2 above £100,000 of income, a pension contribution reduces ‘adjusted net income’ allowing the personal allowance to be reclaimed in part or in full. This similarly applies to individuals subject to the high-income child benefit tax charge.

Basic planning can help to reduce a CGT bill

Simple planning can help your client avoid paying a higher rate of tax on a taxable gain(s). Your client must be eligible to make a relief at source pension contribution (and have sufficient annual allowance remaining) and have sufficient funds to make one. The proceeds from the disposal could of course provide some or all of the money.

We will look at two examples to demonstrate how this works in practice. The first demonstrates the CGT rate reduction whereas the second shows the added value of pension contributions for high earners.

The examples use 2023/24 allowances and bands:

• Personal allowance = £12,570
• Basic rate band = £37,700

Summary

Paying tax on an investment gain is a sign that you have managed your clients’ money well. Sometimes the tax bill is inevitable, but you can add further value by providing a well-rounded exit strategy from the investment by combining with contributions towards their retirement provision. This can help by:

• reducing the rate of tax applicable on the investment gain (direct saving) or
• having additional money applied to a pension scheme via relief at source (indirect saving)
• achieving tax efficient growth and income within the pension (indirect saving)
• assisting with generational planning, passing money down the generations without suffering Inheritance Tax in most situations (indirect saving).