Inflationary gains and the cgt trap
Inflation has been the unwelcome guest in the UK economy for the past few years, and while it’s finally cooling, many business owners and investors are only now realising the tax consequences. If you’ve held property, shares or other assets through a period of high inflation, you may be sitting on significant gains—but here’s the catch: Capital Gains Tax (CGT) doesn’t account for inflation. This is known as the “inflation trap,” and it could cost you thousands in unexpected tax bills. Let’s explore what this means for your finances and how to navigate it.
Understanding the Inflation Trap
When you sell an asset for a profit, HMRC calculates your taxable gain as the sale price minus your original purchase cost. Sounds straightforward, but inflation complicates this. If you bought a property in 2015 for £300,000 and sold it in 2024 for £450,000, you might think your gain is £150,000. However, a significant portion of that increase is simply due to inflation eroding the pound’s purchasing power—not genuine profit. Yet HMRC taxes the full £150,000 gain.
Until 1995, there was some relief through “indexation allowance,” which adjusted costs for inflation. However, this was abolished for individuals and remains restricted for companies. Today, only limited relief exists, primarily through the annual CGT exemption (currently £3,000 for the 2024/25 tax year, reduced from £6,000 the previous year).
Who’s Most Affected?
The inflation trap primarily affects those with significant assets held over several years. Buy-to-let landlords, business owners selling commercial property, and long-term investors are particularly vulnerable. If you’re in the higher tax bracket, a 20% CGT charge combined with inflation-inflated gains can seriously dent your proceeds.
For instance, if you’re a higher-rate taxpayer with a £100,000 gain, you’ll pay £20,000 in CGT—but perhaps £5,000 to £8,000 of that gain is simply inflation, not real profit. This is where planning becomes essential.
Strategic Timing and Disposal Planning
One practical approach is timing your disposal carefully. Spreading sales over multiple tax years allows you to utilise multiple annual exemptions. In 2024/25, if you’re selling a property, you could sell part of it (or assets from a portfolio) in one tax year and the remainder in the next, claiming £3,000 exemption each time. This requires careful structuring and shouldn’t be attempted without professional advice, but it’s a legitimate strategy.
Also consider which assets to sell first. If you hold both appreciating and depreciating assets, selling losses can offset gains. This “loss harvesting” is a valid HMRC-approved strategy that many overlook.
Holding or Restructuring
For some, avoiding the sale altogether is the best option. If you don’t sell, you don’t trigger CGT. For property investors, this might mean holding longer or refinancing rather than selling. For business owners, it’s worth considering whether restructuring via incorporation or a formal partnership might offer better outcomes. Again, this requires bespoke advice—the tail shouldn’t wag the dog.
If you do hold assets, review them regularly. Inflation that has already occurred is “locked in.” There’s often little point waiting for further appreciation if the underlying asset is declining in real terms.
Planning with Your Accountant
The key is advance planning. Don’t wait until you’ve already exchanged contracts on a property sale to discover your tax liability. A few months’ planning beforehand can genuinely save thousands.
Before any major asset disposal, work with your accountant to:
- Calculate projected gains and tax liability
- Review your available exemptions and reliefs
- Consider timing across tax years
- Explore whether restructuring makes sense
- Understand your personal circumstances (are you a basic-rate or higher-rate taxpayer? Are you married?—spousal transfers can help)
Conclusion
Inflation has created a peculiar injustice in the tax system: you’re paying tax on gains that partly reflect currency devaluation, not real economic profit. Whilst HMRC won’t offer sympathy, intelligent planning can help. The difference between a rushed sale and a considered, planned disposal can easily amount to five figures.
If you’re considering selling any significant assets—whether property, shares, or business interests—now is the time to get proper advice. The cost of professional guidance will likely be recouped many times over.
For tailored advice, contact Severn Accounting — we’re here to help.