Capital Gains Tax (CGT) is charged when you sell, gift, dispose of or transfer an asset, such as a property or shares. In recent years the amount of CGT charged in the UK has risen significantly, climbing from £2.5 billion ten years ago to £9.8 billion in 2019/20. Reducing your CGT bill is possible through the use of a range of annual exemptions and other methods. It’s also worth noting that whilst you usually won’t face CGT on your main home, if you have another property you could find yourself facing an additional bill when you come to sell it.
The current rates for CGT are linked to your Income Tax rate. So, if you pay higher rate Income Tax you’ll attract a 28% CGT charge on any profits made from residential property and 20% on any other assets. If you pay basic rate Income Tax, the rate of CGT you pay will depend on the size of the profit but at least some of the profits will be taxed at the lower CGT rates of 10% and 18%.
Use your CGT allowance
Generally, CGT is calculated based on the net capital gains made in the tax year and your total income. Every tax year you are entitled to an annual CGT allowance, which is currently set at £12,300. This means that generally any profit made from the assets you sell or transfer won’t attract CGT, as long as you stay under this threshold. Your annual CGT exemption allowance can’t be carried forward (it’s considered a ‘use it or lose it’ allowance) so it’s important to try and take advantage of as much as you can each year and, for example, your spouse is using their annual allowance each year as well. A couple can usually shelter £24,600 of capital gains made from tax each tax year.
Use your annual ISA allowance
Any gains made in an ISA fall outside the net of CGT, so it makes sense, particularly if you pay higher rate tax, to use your annual ISA allowance. This tax year (2021/22) you are able to invest up to £20,000 in an ISA, and for couples the allowance effectively doubles to £40,000.
Contribute to a pension or make a gift donation to charity in Belgium
You can also reduce your CGT liability by making a pension contribution or a gift donation to charity. Doing so effectively increases the upper limit of your Income Tax band, helping you to reduce the amount you might need to pay on any gains you do make, by keeping you in a lower rate band. For example, if you decide to make a pension contribution of £8,000 in the 2021/22 tax year, the point at which higher rate tax becomes payable rises from £50,270 to £60,270.
Transfer assets between spouses or civil partners
Another option is to transfer any assets to your spouse or partner to reduce your liability. Any transfers between spouses and civil partners don’t attract CGT, so you can shift assets from one partner to the other to make the best use of each person’s annual allowance. By using this strategy you can ‘double up’ your annual CGT exemption to £24,600. It’s worth bearing in mind that any transfer has to represent a true, outright gift.
Spread gains over tax years
It’s also possible to split any profits across two tax years to help reduce your CGT tax bill. So if you are planning to sell some of your shares you could split the sale into two parts, selling one portion in 2021/22 and another batch on 6 April 2022. This strategy effectively doubles the exemptions available to set against the gains made.
Invest in small companies
Another method of reducing your CGT bill is to invest in small companies using two allowable tax reliefs. The first of these is through the use of the Seed Enterprise Investment Scheme (SEIS) which was introduced by HMRC in 2012 to help early-stage companies raise funds through investors. A series of tax reliefs were introduced on investments made to companies that qualify for the criteria. CGT relief is available when profits realised within three years are re-invested into the Seed Enterprise Investment Scheme. There are some complexities to accessing this relief so it’s worthwhile discussing your plans with a specialist.
Another option, similar to the SEIS, is the Enterprise Investment Scheme (EIS) which was designed to help companies raise money to grow their businesses by offering tax reliefs to investors who buy shares in a company. There are a number of reliefs associated with EIS, all of which are dependent on the state of the company in question. Again, it’s useful to discuss your plans with an expert before applying.
Careful planning can help you reduce your CGT bill, but this area of tax planning can be complex, and it’s important to speak to a tax expert to ensure that your situation is properly reviewed, and the right arrangements made.
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