SEVERAL WAYS TO REDUCE YOUR CAPITAL GAINS TAX LIABILITY
From using your annual exemption to saving in an ISA, discover ways to potentially reduce your capital gains tax liability.
Capital gains tax (CGT) is a tax that may be charged on the gains you make when selling, gifting, transferring or exchanging certain assets.
These assets include shares, collective investments, personal possessions worth £6,000 or more, and property that is not your main home. Higher-rate taxpayers currently pay CGT at 20% on gains from investments and at 28% on gains from residential property. For basic rate taxpayers, these rates may be reduced to 10% and 18%, respectively.
There are several ways to reduce CGT, ensuring that you keep more of your money. However, CGT can be highly complex and, without expert advice, there is a risk you could end up pay more than you should or paying it unnecessarily. Here are some ways to potentially reduce your capital gains tax liability.
Make the use your CGT annual exemption
Everyone is entitled to an annual CGT exemption which enables you make tax free gains of up to £12,300 in the 2021/22 tax year. This cannot be carried forward into the next tax year, so making use of your tax-free annual exemption each year could reduce the risk of incurring a significant CGT liability this tax year and in the future.
Make use of losses
Minimise your CGT liability by using your losses to reduce your gain. Gains and losses realised in the same tax year must be offset against each other, which can reduce the amount of gain that is subject to tax. Unused losses from previous years can be brought forward, provided they are reported to HMRC within four years from the end of the tax year in which the asset was disposed of.
Transfer of assets between spouses or civil partners
Transfers between spouses and civil partners are exempt from CGT, which means assets can be transferred from one partner to the other to use each person’s annual CGT exemption. This effectively doubles the CGT exemption for married couples and civil partners to £24,600. The transfer must be a genuine, outright gift.
Claim gift hold over relief
Gift hold over relief could be available if you give away certain business assets or sell them for less than they are worth to help the buyer. If you are eligible, you won’t pay CGT when you give away the assets, but the person you give them to might be liable for CGT when they sell them. You must meet several eligibility conditions, so if you are not sure speak to a professional adviser.
Invest in an ISA or bed and ISA
Gains (and losses) made on investments held within an ISA are exempt from CGT, so it makes sense, particularly for higher-rate taxpayers, to use your ISA allowance each year. In the 2021/22 tax year, you can invest up to £20,000 in an ISA. For married couples and civil partners, the ISA allowance effectively doubles to £40,000.
There is also a tactic called “bed and ISA”, which involves selling assets to realise a capital gain and then immediately buying back the same assets inside an ISA. This enables all future gains on the asset to be CGT free.
Bear in mind that you may pay stamp duty and other costs when repurchasing investments in an ISA and there is a risk of being time out of the market, however small, will detrimentally impact your investments. If you are not sure, speak to a financial adviser.
Contribution to a pension scheme
Making a pension contribution from net relevant earnings could help you save on CGT because it effectively increases the upper limit of your income tax band. If, for example, you made a gross pension contribution of £10,000, the point at which higher-rate tax becomes payable would rise from £50,270 to £60,270 in the 2021/22 tax year. If your capital gain plus other taxable income fell within this extended basic-rate income tax band, CGT would be payable at the lower tax rate (10%, 18%) instead of the higher tax rate (20%, 28%).
Chattels that escape CGT
Gains on possessions such as antiques and collectibles, called “chattels”, may be tax free. For example, items with a predictable life of 50 years or fewer, known as “wasting assets”, such as antique clocks, vintage cars, pleasure boats and caravans are CGT free, provided they were not eligible for business capital allowances.
For non-wasting chattels, like paintings and jewellery, the CGT position depends on the sale proceeds, with those £6,000 or under usually being exempt.
Invest in an Enterprise Investment Scheme (EIS)
Any gains that are made on investments in an Enterprise Investment Scheme (EIS) are free from CGT if held for three or more years.
You might be able to defer a capital gain by investing that gain in an EIS qualifying company, but only if the investment is made one year before or up to three years after the gain arose. The deferred capital gain will come back into charge once you take your money out of the EIS qualifying company.
You should be aware of the risk and downside of Enterprise Investment Scheme, that these types of schemes are higher risk than traditional investments.
Give to charity
If you give land, property or qualifying shares to a charity, income tax relief and CGT relief are available.
It is advisable to seek professional advice
Avoid the avoidable. CGT is a complicated subject, so make sure you seek professional advice. An adviser will make sure you are maximising all your tax reliefs, allowances and exemptions, explain your options, and advise on the best course of action for your individual circumstances.
This guide is for general information only and does not substitute specific advice. While we believe it to be correct at the time of writing, you should not rely on it as specific advice and Peria & Co cannot accept any liability for its contents. If you need guidance please contact us here or call us on +44 (0)1932 849023.