Understanding the Annual Exempt Amount (AEA) and Capital Gains Tax (CGT)

If you’re liable for Capital Gains Tax (CGT) in the UK, you’re generally entitled to an annual tax-free allowance called the Annual Exempt Amount (AEA). This allowance helps reduce the tax burden on capital gains, ensuring that you pay CGT only if your net taxable gains for the year exceed the AEA. However, non-domiciled individuals who claim the remittance basis of taxation on foreign income and gains are not eligible for this benefit. Thus, we have everything covered for you, from understanding AEA & CGT, eligibility to planning ahead for you in this blog post.

Understanding the Annual Exempt Amount (AEA) and Capital Gains Tax (CGT)

Eligibility for the Annual Exempt Amount

The AEA applies to:

• Individuals living in the UK.
• Executors or personal representatives handling a deceased person’s estate.
• Trustees managing assets on behalf of disabled individuals.

Most other trustees are entitled to a lower AEA. Non-residents disposing of UK residential property are generally eligible for the AEA, similar to UK residents. However, companies disposing of UK residential property cannot claim the AEA and may need to rely on other allowances.

Using the Annual Exempt Amount

The AEA is an annual tax-free threshold that reduces the taxable portion of your gains. If your net gains after deducting losses and applying reliefs fall below the AEA, you don’t owe any CGT. If your gains exceed the AEA, only the amount above the threshold is taxed. For individuals, personal representatives, and trustees for disabled people, the AEA has steadily decreased in recent years, with significant reductions effective from the 2023–24 tax year. It’s important to check the current AEA limits to plan your finances accordingly.

Special Rules for Executors and Trustees

Executors and Personal Representatives

If you’re managing the estate of someone who has passed away, you may claim the full AEA during the administration period. This includes:

• The tax year in which the individual died.
• The two subsequent tax years.

After this period, no further AEA is available, and any gains during the administration period will be fully taxable.

Trustees for Disabled Individuals

Trustees managing assets for a disabled person qualify for the higher AEA rate. For CGT purposes, a disabled person is defined as someone with mental health issues or a recipient of the middle or higher rate of Attendance Allowance or Disability Living Allowance.

Capital Gains Tax Rates

The CGT rate you pay depends on your total taxable income and the nature of the asset sold. For individuals, rates vary based on whether the gains relate to residential property, carried interest, or other investments.

Current CGT Rates

• Gains on most assets: Taxed at a lower rate for basic-rate taxpayers and a higher rate for those in the higher or additional tax bands.
• Residential property gains: Taxed at a higher rate than other types of assets.
• Gains qualifying for Business Asset Disposal Relief: Taxed at a reduced rate of 10%.

For trustees and personal representatives, gains are typically taxed at higher rates.

Planning Ahead

To stay compliant and optimise your tax position:

1. Keep accurate records of all capital transactions and expenses.
2. Plan the timing of asset disposals to make full use of your AEA.
3. Seek professional advice if you’re unsure about how to apply the rules, especially for complex scenarios involving trusts, estates, or non-domiciled status.

Understanding the nuances of the AEA and CGT is essential for effective financial planning. By staying informed, you can take advantage of available tax-free thresholds, avoid penalties, and ensure compliance with UK tax regulations. Get solutions about Annual Exempt Amount (AEA) and Capital Gains Tax (CGT) from AccelUS.