4 Tips to Cut Your Capital Gains Tax
When you sell something at a profit (e.g. company shares), then chances are you will need to factor in a capital gains tax (CGT) on that profit. In the UK there are two main types of CGT:
- Tax on residential property (e.g. selling a second home). This is set at 18% when you are a Basic Rate taxpayer, or 28% if you fall into the Higher or Additional Rate.
- Tax on assets (e.g. selling non-residential property). Here, the CGT is usually 10% on assets for Basic Rate taxpayers, and 18% for those who pay 40% or 45% Income Tax.
Certain assets are excluded from CGT when you sell them, such as selling your main home or your family car. However, typical assets which do incur a charge include selling:
- Jewellery and other valuables (e.g. art).
- Funds & shares.
- A business.
You do need to be careful when working out your CGT bill, as profits you make on your sales could take you from the Basic Rate into the Higher Rate tax bracket. If this happens, then you will likely end up paying the Higher Rate of CGT.
Naturally, most people would like to reduce their CGT liability if it is possible. In this short guide, we’ll be sharing 4 ways you can do this. Please note, however, that this content is for inspiration and information purposes only, and should not be taken as financial advice. To gain regulated, tailored advice into your own situation, please consult an independent financial adviser.
#1 Know & Use Your Annual Allowance
CGT is only due on profits which exceed a certain threshold within a financial year. In 2019-20, this threshold is set at £12,000 for individuals and £6,000 for trusts.
So, if you sell a set of shares within a financial year where the profits total at £10,000 within the tax year, you might not have to pay any CGT on these profits.
Naturally, knowing about your CGT allowance and taking advantage of it can be a powerful way to minimise your charges. For instance, one approach might be to spread the sales of your assets across two financial years in order to keep your gain within your allowance for each year, rather than selling everything in one year (which might make you liable to a charge).
#2 Gifting Assets
Sometimes spreading your profits across two tax years isn’t always possible, or sufficient to eliminate or significantly reduce a CGT bill. However, one other possibility is to gift some of your assets to your civil partner or spouse in order to leverage both of your allowances.
For married couples and civil partners, each of you is entitled to a £12,000 CGT allowance in 2019-20. Taken together, therefore, you have a £24,000 allowance. If one of you, say, is looking to sell some assets within a given tax year which would profit at £20,000, then £8,000 would be liable to CGT. If, however, you transferred ownership of those assets valued at £8,000 to your spouse or civil partner first, and then sold them, you could avoid paying CGT altogether.
In fact, gifting assets in this way can be a nice way to reduce a CGT bill if, for instance, you are a Higher Rate taxpayer and your spouse or civil partner is a Basic Rate taxpayer. Since they would pay CGT at a lower rate on the assets they sell for a profit, you could reduce the overall CGT on your household income by gifting some of your assets to them prior to selling.
#3 ISA Gains
An Individual Savings Account (ISA) is a powerful way to make savings and investment gains, within a useful “tax wrapper”. In 2019-20, you can place up to £20,000 into an ISA in the form of stocks and shares, or cash, and keep any gains made within the ISA free from CGT.
It is striking how many investors forget about this powerful way to reduce CGT. Make sure you speak to a financial adviser about how to make the most of our ISA allowance. Some diligent investors have managed to build up ISA portfolios worth hundreds of thousands over several years which are essentially shielded from CGT, so it can be very worthwhile.
#4 Small Company Investments
If you have a passion for investing in small businesses, are an experienced investor and have a higher risk appetite, then committing some of your money towards a Venture Capital Trust (VCT) or Enterprise Investment Scheme (EIS) can be a powerful way to do this whilst also claiming back some Income Tax and Capital Gains Tax.
By investing in EIS-qualified companies, for instance, allows you to claim back 30% of the value of the investments against your Income Tax bill. Any gain you make on the shares is also free from CGT. There are conditions attached to these benefits, however, such as the requirement that you hold onto the shares for at least 3 years.
Moreover, under EIS rules you can also defer some of your CGT liability if you sell an asset (any asset) and use the profits to invest in EIS-qualifying companies or EIS funds. When you eventually dispose of the EIS shares, however, you will usually have to then pay the CGT.
The Treasury brought in £8.8bn in 2018-19 via CGT receipts, but much of this will be due to investors not taking advantage of the relief which is legitimately available to them.
Here, we have just scratched the surface regarding some of the tactics available to you, for reducing your CGT exposure. Speaking with an independent financial adviser, however, can help you unearth more methods for potential use, and help you identify an appropriate strategy for your particular financial goals and situation.
To start a conversation with a financial adviser here at Castlegate, please do get in touch to arrange a no-obligation consultation with a member of our team, at our expense.