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How to reduce your Capital Gains Tax

Capital Gains Tax (CGT) is one of those financial terms with the potential to send shivers down anyone’s spine. Often seen as a hindrance, it is a tax levied on the profit gained from selling an asset like property, shares, or valuable possessions. 

While paying tax is a civic duty, there’s no reason you shouldn’t take advantage of legitimate means to reduce your CGT liability. In this blog, we’ll cover some tried and tested strategies to help you minimise your CGT burden.

Understand Your Allowance

Before plunging into complex tax-saving mechanisms, it’s important to understand that the UK has an annual tax-free allowance known as the annual exempt amount (AEA). This is the amount you can make in capital gains without paying any tax. Always take this into account before making any disposals.

For the tax year 2023 to 2024, the AEA is £6,000 for individuals and personal representatives and £3,000 for most trustees. For the tax year 2024 to 2025 and subsequent tax years, the AEA will be permanently fixed at £3,000 for individuals and personal representatives, and £1,500 for most trustees.

How much Capital Gains Tax will I pay?

Again, before looking at ways to minimise your tax payments, it’s good to know how much tax you’ll expect to pay when you sell your assets.

The rates differ if you are looking at gains from residential property and whether you pay a higher rate of Income Tax.

If you pay a higher rate of Income Tax, you’ll pay:-

  1. 28%* on your gains from residential property
  2. 20%* on your gains from other chargeable assets

If you pay basic rate Income Tax, you’ll need to:

  • Work out how much taxable income you have
  • Work out your total taxable gains
  • Deduct your Capital Gains tax-free allowance. 
  • Add this amount to your taxable income.
  • If this amount is within the basic Income Tax band, you’ll pay 10%* on your gains (or 18%* on residential property). You’ll pay 20%* on any amount above the basic tax rate (or 28%* on residential property)

7 Ways to Reduce Capital Gains Tax

  1. Utilise the Spouse Exemption

One of the ways to minimise your Capital Gains Tax is to utilise the spouse exemption. If you’re married or in a civil partnership, you can transfer assets to your spouse or civil partner without triggering CGT. Once the asset is in their name you can utilise both your tax-free allowances, effectively doubling the tax-free amount.

  1. Hold Investments in a Tax-Efficient Wrapper

You might consider holding your investments in an Individual Savings Account (ISA) or a pension fund. Investments within these wrappers can grow and be withdrawn tax-free, offering a legitimate way to avoid CGT. However, bear in mind there are annual limits on contributions to these accounts, so plan wisely.

  1. Offset Your Losses

Another effective way to reduce your CGT is by offsetting capital losses against your capital gains. If you have investments that aren’t performing well, consider selling them to realise a capital loss. These losses can then be used to offset gains, reducing your overall tax liability. You can even carry forward unused losses to offset against future gains.

  1. Make Use of Business Asset Disposal Relief

If you own a business, Business Asset Disposal Relief (formerly Entrepreneurs’ Relief until 2020) could be beneficial. This relief allows you to pay a reduced tax rate of 10% on gains from selling all or part of your business, subject to certain conditions. The lifetime limit for this relief is £1 million, so it’s an excellent way to save on large capital gains.

To qualify for the relief, you must have been a sole trader or business partner for 2 years and owned the business for at least 2 years up to the date you sold your business.

  1. Invest in Enterprise Investment Schemes (EIS)

The EIS is designed to help smaller companies raise finance by offering tax relief to investors. By investing in an EIS-eligible venture, you can defer CGT from other assets as long as the gain is invested in the EIS within a set period. Plus, there are other tax benefits of investing in an EIS, such as income tax relief and inheritance tax exemption.

  1. Make Charitable Contributions

Giving to charity can also help reduce your CGT. If you donate an asset to a registered charity no CGT will be due. Alternatively, you can sell an asset to a charity at less than its market value, which will minimise the capital gain and, therefore, the CGT.

  1. Plan Your Disposals

Timing is everything. Spreading the disposal of assets across multiple tax years can help you maximise your annual tax-free allowance. By planning the timing of your disposals wisely, you can reduce the amount of gain subject to CGT.

Still have questions?

Capital Gains Tax may seem daunting, but there are various strategies to mitigate the amount you pay. By understanding your tax-free allowance, utilising tax-efficient wrappers, and making smart financial decisions, you can minimise your CGT liability and keep more of your hard-earned money. Always remember that failing to plan is planning to fail, especially where taxes are concerned.

If you still have questions about Capital Gains or any other taxes, get in touch or contact us online here

* Remember, these figures can change based on government decisions

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How Are the Changes to CGT Impacting Property Investment’S?

In his Autumn Statement in November 2022, Jeremy Hunt, the UK’s Chancellor, announced changes to Capital Gains Tax (CGT). These changes came into effect in April 2023 and have certainly made their mark on property investment and it’s now more expensive for investors to sell properties, reducing the potential profits.

The reduction in CGT allowance

One of the biggest changes is the reduction in the CGT annual exemption, set to drop from £12,300 to £6,000 in 2023/24 and investors will have to pay CGT on any gains made on property sales above the new exemption level. For example, if an investor sells a property for £200,000, making a gain after deducting allowable costs of £100,000, and has already used their annual exemption, they will have to pay CGT on every penny of the £100,000 profit.

The increased CGT for higher-rate taxpayers

Another change making waves is the increase in the rate of CGT for higher-rate taxpayers. If you’re a higher or additional rate taxpayer you’ll now pay 28% on your gains from residential property and 20% on your gains from other chargeable assets.

If you’re a basic rate taxpayer, then the rate you pay depends on a few different things, from the size of your gain to your taxable income and whether your gain is from residential property or other assets.

The changes to CGT have hit some property investors hard as it’s not only now more expensive for investors to sell properties, their potential profits are squeezed and they’re finding it harder to grow their portfolios.

Benefits from the CGT changes

But, believe it or not, there are some potential perks to the CGT changes. The drop in the annual allowance may encourage investors to keep their properties for longer, reducing the number of properties on the market and pushing up prices.

Top CGT tips for property investors

Here are our tips for property investors affected by the changes to CGT:

  • Plan property sales carefully. Plan any property sales and make sure that you sell when you can make the most profit.
  • Consider holding onto properties for longer. Don’t panic sell. Consider keeping properties for longer to potentially avoid paying CGT.
  • Invest in different asset classes. Look at investing in different asset classes, such as stocks and shares, to reduce your exposure to CGT.
  • Seek professional advice. As with all investments and money matters, we always recommend getting advice from a qualified accountant or tax adviser to understand the changes to CGT and how they may affect your investments.

Overall, the changes to CGT have had a mixed impact on property investment. As we’ve seen, it’s now more expensive for investors to sell properties and the potential profits on property sales aren’t what they once were. On the flip side, there are potential benefits, too, like encouraging investors to keep properties for longer and reducing the number of properties on the market for a better balance when it comes to supply and demand. The fewer properties there are to complete with, the higher price you can command for your own bit of bricks and mortar.