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Strategies for Minimising Your Capital Gains Tax Liability
20 June 2023
WHAT’S CAPITAL GAINS TAX?
When you make a profit through selling (or disposing of) something (an ‘asset’) that’s increased in value, you’ll be taxed on the gain you make – not the amount of money you receive.
This is known as Capital Gains Tax (CGT).
For example, you purchased a painting for £10,000.
You sold it for £25,000.
You’ve gained £15,000. You’ll be taxed on this gain.
But – you only have to pay CGT on overall gains above your tax-free allowance, otherwise known as the ‘Annual Exempt Amount’ (AEA).
WHAT’S CONSIDERED A ‘CAPITAL GAIN’?
Here are some examples of chargeable assets you pay CGT on:
- Personal possessions worth £6,000 (not including your car)
- Property that’s not your main residence
- Your main residence if you’ve let it out or used it for business
- Any shares that aren’t in an Individual Savings Account (ISA) or Personal Equity Plan (PEP)
- Business assets
WHAT DOES IT MEAN TO ‘DISPOSE OF’ AN ASSET?
Disposing of an asset includes:
- Selling it
- Transferring it to someone else or gifting it
- Exchanging it for something else
- Getting compensation for it, like an insurance pay out
DO I HAVE TO PAY CAPITAL GAINS TAX?
You only have to pay CGT on total gains above the annual tax-free allowance and you don’t need to pay it on certain assets, like ISAs or PEPs, UK government gifts and Premium Bonds, or betting or lottery winnings.
You won’t usually have to pay tax on gifts to your wife, husband, civil partner or charities. However, gifting a business or shares in a business to a family member’s still considered a disposal for Capital Gains.
Any transfers to ‘connected parties’ or sales at undervalue are deemed to be at market value in calculating the gain. ‘Connected parties’ include parents, children, brothers, or sisters.
what are the capital gains tax rates?
- Higher or additional rate taxpayers: 28% on your gains from residential property and 20% on gains from other chargeable assets.
- Basic rate Income Tax payers: it depends on the size of your gain, your taxable income, and whether your gain’s from residential property or other assets.
WHEN ARE CAPITAL GAINS TAXES DUE?
CGT are only due once you’ve sold an asset.
If you’ve sold a residential property (or are planning to), you may need to submit a CGT return and pay any tax due 60 days after completion.
6 WAYS TO REDUCE YOUR CAPITAL GAINS TAX BILL
You might be able to reduce your CGT liability through these strategies.
1. Make use of your annual exemption to reduce CGT – as you can’t carry your annual CGT exemption forward, spread disposals across multiple years, or split them either side of a financial year.
2. Dispose of assets at a loss – you can carry forward losses to offset against gains made in future years. Consider disposing of other chargeable assets which are no longer valuable (e.g., poor performing investment stocks and shares), and use the loss made on this disposal to offset against the CGT bill arising from the more profitable disposal.
3. Think about tax-free investments – You might want to consider making investments through the Seed Enterprise Investment Scheme (SEIS) or Enterprise Investment Scheme (EIS). If the shares are held for at least 3 years, you won’t need to pay CGT on the gains. Plus, if the shares are sold at a loss, the loss can be used to offset against personal income instead of Capital Gains.
Whilst SEIS and EIS are risky investments, they also get income tax relief at 30%.
4. Pay into a pension fund – Paying into a pension fund’s an effective way to reduce your Capital Gains liability, especially if you’re a higher or additional rate taxpayer. When you pay into a pension, you’ll receive tax relief by way of extending your basic rate income tax band.
5. Do your bit for charity – Similarly to paying into a pension, donating assets or cash to charity helps reduce your CGT bill by extending your basic rate income tax band, allowing more CGT to fall into the lower rates.
6. Inter-spouse transfers – In simple terms, for married couples or civil partners, you can transfer assets and cash tax-free between each other. Together, you can earn gains of up to £12,000 CGT-free each year. The transfer must be a genuine, outright gift.
CAN CAPITAL GAINS BE CARRIED FORWARD?
No – the annual CGT exemption can’t be carried forward. This means if you make no disposals in one year, you can’t carry that exemption forward to use together with the following year’s exemption.
UNSURE ABOUT YOUR CAPITAL GAINS TAX ALLOWANCE OR CURIOUS ABOUT HOW CGT AFFECTS YOUR INVESTMENT AND FINANCES?
Whether you’re a seasoned investor, or just starting out, understanding the complexities surrounding CGT is crucial for making informed decisions and maximising your financial outcomes.
An important note: Content correct at time of publishing.