What is Capital Gains Tax?
Capital Gains Tax (CGT) has been an effective earner over the years for HMRC According to the Office for National Statistics (ONS), CGT receipts in January 2019 were £6.8 billion, an increase of £1.2 billion compared with January 2018, and the highest intake on record. With moves afoot by the current government to raise revenue in the wake of the pandemic through increasing the CGT percentages paid we look at the best ways to reduce your Capital Gains Tax liability.
Capital Gains Tax (CGT) is paid on the gain when you sell something, this could be any of your possessions worth £6,000 or more (not including a car, we’ll come on to that later), any property that is not your main residence (unless it’s larger you have let part of it out, you have used it exclusively for business or you bought it to make a gain), shares not in an Individual Savings Account (ISA) or any business assets.
Reduce your CGT liability
- Every adult in the United Kingdom has an annual Capital Gains Tax allowance, for 2020/2021 this is £12,300, so make sure you use it every year
2. You can deduct losses, so it might be worth selling chargeable assets at a loss if your gains in the tax year exceed the £12,300 CGT allowance. Report losses on chargeable assets to HMRC and these “allowable losses” will be deducted from your gains in the tax year. These allowable losses can be carried over from previous tax years.
3. Transfer assets to your civil partner or spouse. Chargeable assets transferred between civil partners or spouses are exempt from CGT, meaning. in practical terms, couples benefit from a £24,600 CGT allowance. Although, if your civil partner or spouse later sells the asset, there might be CGT to pay.
4. Use your ISA allowance Capital Gains (and losses) on stocks and shares held in an ISA are exempt from CGT. Every adult in the United Kingdom has a £20,000 ISA allowance for 2020/2021.
5. Use your civil partner or spouse’s ISA allowance. Your civil partner or spouse also has a £20,000 ISA allowance for 2020/2021, so introduce money into their ISA to maximise the benefits.
6. If you reduce your income tax rate your Capital Gains Tax Liability also falls. The rate of CGT is linked to your income tax band. For example, a basic-rate taxpayer will pay 10% on their gains from chargeable assets (18% on residential property), whereas a higher-rate taxpayer will pay 20% on their gains from chargeable assets (28% on residential property). Reduce your income tax rate through pension contributions or Gift Aid, for example, and your CGT rate will also be reduced.
7. Gift land, property or shares to charity. You do not have to pay CGT on assets you give away to charity.
8. Invest in an EIS or a SEIS. Invest in the high-risk, illiquid Enterprise Investment Scheme (EIS) or the Seed EIS and any profit you make on your investments will be free of any Capital Gains Tax liability.
9.Take advantage of Gift Hold-Over Relief. If you give away business assets (including shares in either a company not listed on a recognised stock exchange or your own company) or sell them for less than they’re worth you can claim Gift Hold-Over Relief, meaning you will not pay CGT. However, the beneficiary of these will be liable to pay CGT (if due) when they dispose of them.
10. Dispose of assets exempt from Capital Gains Tax. Some assets, such as Premium Bonds, UK government gilts and “wasting assets” (assets with a predictable life of 50 years or fewer), e.g. antique clocks or vintage cars, are all exempt from CGT.
There are ways to sensibly reduce the amount of tax you have to pay, and knowing the rules should help you reduce your Capital Gains Tax liability.
At Killik & Co we can advise you on how to best structure your investments to help maximise this.
This short How to save and invest tax-efficiently guide should be enough to get you started on the road to successful tax planning. Please fill out your details below to download a free PDF version or contact us at [email protected]
