Capital Gains Tax (CGT) is a complicated tax that often catches people unawares. Sometimes, people find themselves paying CGT unnecessarily, or fail to pay the correct amount and face fines as a result. However, with some useful knowledge, and good financial planning, there are plenty of ways to reduce Capital Gains Tax, or even avoid it altogether.
Capital Gains Tax UK receipts have grown considerably over the past ten years, with receipts for the year topping £9 million, compared to just £2.5 million ten years before.
CGT is charged on the profits made when certain assets are sold or transferred. Sales of shares make up the majority of this tax, followed by residential property. Other assets liable for CGT include the likes of investment funds and business assets, and works of art, jewellery and collectibles such as coins and stamps worth over £6,000.
The good news is that everyone, including children, has an annual CGT exemption. For the 2021-2022 tax year and up to 2026, this has been frozen at £12,300, or £6,150 for trusts. This means that any gains made below that amount will incur no tax, and only gains over that amount will be charged at 10 or 20 per cent, depending on other income.
What is the rate of Capital Gains Tax in the UK?
The applicable rate of Capital Gains Tax depends upon income. Basic rate taxpayers will pay 10 per cent for most assets, and 18 per cent on residential property that is not the primary residence. This applies to assets sold within an individual’s Income Tax basic rate band.
If your combined income and gains are above the higher rate threshold, then the CGT rate will be 20 per cent for most assets, and 28 per cent for non-primary residence residential property.
Are there any assets that are exempt from CGT?
Assets held in an ISA or pension are free from CGT. Similarly, if you sell your car, or your primary residence, then you won’t be liable to pay CGT. However, if you have used your primary residence to run a business, or have let it out for financial gain, then Capital Gains Tax will apply.
Any assets given away to charity are not subject to CGT, however, if you sell an asset to charity for more than you paid for it, or less than market value, then you could fall into the CGT trap.
How to reduce Capital Gains Tax?
There are various ways in which you can reduce your Capital Gains Tax bill.
Utilise your annual CGT exemption
Your annual exemption cannot be carried forward, so be sure to use it when reporting your gains.
Transfer assets
Most sales or transfers of assets between spouses or civil partners will not incur a CGT liability. Transferring assets allows you to take advantage of combined CGT exemptions. It is also possible to split gains over two tax years, making use of both years’ allowances.
Reduce Income Tax
Because the CGT rate payable is based on an individual’s Income Tax band, reducing the rate of Income Tax can have a positive effect on CGT. There are various ways to do this, for example by paying into a registered pension scheme.
Make use of losses
If you sell an asset and make a profit, but then sell another and make a loss, you can offset the loss against the gain when calculating your CGT liability. Losses can be carried forward for up to four years. Even if there is no CGT to pay in any given tax year, it is vital that you submit details of losses in your tax return so that it is more straightforward to offset them against gains in future tax years.
Deduct costs
If you have spent money on improving your assets, for example renovating a property or restoring a work of art, then you can deduct those costs from the sale price so as to reduce Capital Gains Tax.
Use an ‘ISA wrapper’
If you have an investment portfolio, you can sell investments and buy them back immediately, putting them in a tax-efficient ISA wrapper. This is an efficient method that helps you make use of your ISA allowance, making your portfolio more tax-efficient with future gains free of CGT.
Make use of Business Asset Disposal Relief when selling a business
If you are selling a business that you have owned for two years or more, and you are a sole trader or partner, then you may qualify for Business Asset Disposal Relief (formerly Entrepreneur’s Relief). This relief acts to reduce the CGT rate on disposals of certain business assets from 20 to 10 per cent.
Take independent financial advice
Every situation is different, and certain Capital Gains Tax mitigation schemes will work better for some than others. The only way to be absolutely certain that you are making best use of all the available ways to reduce Capital Gains Tax is to take advice from an independent financial adviser with specialist knowledge of taxation.
Looking to reduce your Capital Gains Tax bill? Talk to the experts at Partridge Muir & Warren.
As chartered financial planners, PMW are respected throughout the industry. If you are looking for advice on how to reduce Capital Gains Tax, whether that is before or after you have disposed of assets, you are welcome to talk to our experts.
With PMW, you can rely on advice that is fully tailored to your unique circumstances, that is focused on your best interests, and that is completely independent.
Please get in touch to talk to our friendly team, and to arrange your no-obligation complimentary consultation?