- Financial planning
- 5 minute read
Capital Gains Tax (CGT) is a complicated tax that often catches people out. In the 2018-2019 tax year, HMRC raised a record £9.2 billion in CGT receipts – 70% more than the revenue collected from Inheritance Tax.
Thankfully, there are many ways to reduce your Capital Gains Tax bill. In this article, we look at the basics of CGT and highlight a number of strategies that could help you lower your future CGT liabilities.
What is Capital Gains Tax?
Capital Gains Tax is a tax that you can be required to pay when you sell or dispose of an asset for a profit. Assets that can be liable to CGT include property, shares, investment funds, jewellery, paintings, coins, stamps, and business assets.
Everyone in the UK has an annual Capital Gains Tax allowance. For the 2020-21 tax year, this is £12,300. This means that any gains realised under this amount incur no Capital Gains Tax.
What is the Capital Gains Tax Rate?
Your rate of Capital Gains Tax will depend on your income.
If you’re a higher or additional-rate taxpayer, the rate of CGT you’ll pay is:
- 28% on gains from residential property
- 20% on gains from other chargeable assets
If you’re a basic rate taxpayer, the rate of CGT you’ll pay will depend on your taxable income, the size of your gain, and whether your gain is from residential property or other assets.
If the sum of your taxable income (your income minus your personal allowance and any other income tax reliefs you’re entitled to) and your taxable gains (total gains minus the CGT allowance) are within the basic income tax band, you’ll pay tax of 18% on residential property and 10% on other chargeable assets. On any amount above the basic income tax band, you’ll pay tax of 28% on residential property and 20% on other chargeable assets.
What assets are exempt from Capital Gains Tax?
There are a number of assets that are exempt from Capital Gains Tax. These include:
- Your main residence, provided it meets certain conditions. If you let it out or use part of it exclusively for business, you will have to pay CGT.
- Assets such as shares and funds that are held within an ISA or pension.
- Personal belongings such as household furniture, paintings, and antiques worth under £6,000.
- Assets given away to charity.
How does Capital Gains Tax on property work?
Capital Gains Tax is generally not payable on your main home. However, it is payable on the sale of second homes and buy-to-let properties. If you sell a second home or buy-to-let property, you’ll need to work out your gain to determine whether you need to pay Capital Gains Tax. A property Capital Gains Tax calculator can be useful in determining how much tax you are required to pay. The sale must be reported, and the tax paid, within 30 days of the sale.
How to reduce your Capital Gains Tax bill
Now that we have covered the basics of Capital Gains Tax, let’s look at some ways in which you can bring down your Capital Gains Tax bill. Here are some straightforward strategies that can help you reduce your CGT liabilities significantly.
Take advantage of your annual CGT allowance
Every individual in the UK has an annual Capital Gains Tax allowance. As long as your gains are under the allowance, you will incur no CGT. This allowance cannot be carried forward, so it can make sense to use some of your allowance each year in order to reduce the risk of incurring a large CGT bill in the future.
Transfer assets to your spouse
Transfers to your spouse or civil partner are currently exempt from Capital Gains Tax as long as the transfers are made with no strings attached. By transferring assets to a spouse or civil partner you can take advantage of your combined CGT allowances. A married couple could potentially realise gains of £24,600 this tax year without incurring any CGT liability. Transferring assets to a spouse in a lower tax bracket can also be an effective CGT strategy.
Spread gains over multiple tax years
If you’re considering selling an asset that is divisible (such as shares or funds), it can make sense to split the sale over multiple tax years. This will enable you to take advantage of two years’ CGT allowances. For example, instead of selling your entire holding in a fund at once, it could pay to make partial sales either side of the end of the tax year. By doing this, you’ll benefit from twice the annual allowance.
Offset any losses against your gains
You can reduce your CGT liability by offsetting losses against gains in the same tax year. If your losses exceed your gains, you can carry these losses forward indefinitely to offset them against future gains, provided you have registered them with HMRC.
You may also be able to reduce your Capital Gains Tax bill by deducting costs related to your assets. For example, if you sell a rental property, you can deduct solicitors’ fees, as well as the stamp duty you paid on the property when calculating your CGT liability.
Manage your taxable income levels
The rate of Capital Gains Tax you pay is dependent on your income tax rate so reducing your income tax rate can help reduce your CGT bill. Two ways you can potentially reduce your taxable income include making pre-tax contributions to your pension and making donations to charity.
Invest within an ISA or pension
One of the most straightforward ways of avoiding Capital Gains Tax is to invest within a tax-efficient account such as a Stocks & Shares ISA. In this type of account, all gains are tax-free. Every adult currently has an annual ISA allowance of £20,000.
Similarly, pensions can also provide protection from Capital Gains Tax as all gains within a pension account are tax-free. Invest within a Self-Invested Personal Pension (SIPP) and you won’t have to worry about CGT.
Consider investments other than property
Any property you own, other than your main residence, is subject to Capital Gains Tax at either 18% or 28%, depending on your tax band. Gains on other assets such as investment funds, however, are taxed at either 10% or 20%. By diversifying away from property, you could potentially reduce your future CGT liabilities.
Invest in early-stage growth companies
Experienced investors that are comfortable taking on risk may want to consider venture capital schemes. These investment schemes, which have been set up by the UK government in an effort to promote investment into small, early-stage companies, offer generous Capital Gains Tax relief. One example of such a scheme is the Enterprise Investment Scheme (EIS). This scheme offers no Capital Gains Tax on gains realised on the disposal of EIS investments provided the investments are held for three years.
Make use of business assets relief
If you give away business assets or sell them for less than they’re worth to help the buyer, you may be able to claim Gift Hold-Over Relief. With Gift Hold-Over Relief, you do not pay Capital Gains Tax when you give away the assets. Instead, the person you give them to pays Capital Gains Tax when they sell or dispose of them.
Business Asset Disposal Relief (which was previously called Entrepreneurs’ Relief) is another form of relief that can be effective for those who own business assets. With this form of relief, you’ll pay tax at 10% on all gains on qualifying assets. The lifetime limit for this relief is £1 million.
Gift assets into a discretionary trust
Trusts can be used to avoid an immediate Capital Gains Tax charge. When you transfer an asset into a trust, the trust ‘inherits’ the original cost of the asset, meaning it is liable to pay the CGT when the asset is sold. Be aware, however, that the rules around trusts are complex, so it’s worth speaking to a financial adviser if you’re considering using trusts to reduce your Capital Gains Tax bill.
Avoid being taxed twice
Finally, it’s worth bearing in mind that upon your death, you have to pay Inheritance Tax on your estate. Holding onto assets later in life, instead of crystallising gains, could essentially help you avoid being taxed twice.
Reducing Capital Gains Tax: planning ahead is the key
As you can see, there are plenty of ways that you can potentially reduce your Capital Gains Tax bill. As always, the key is to plan ahead. With careful planning and some help from a Capital Gains Tax expert, you may be able to lower your future CGT liabilities significantly.
To find out more or if you have any questions about Capital Gains Tax, don’t hesitate to request a call back.
Please note that any tax benefits will depend on your personal tax position and rules are subject to change. The value of investments can go down as well as up, and you may get back less than you invested.