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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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What to Do With an Inherited Property?

Aside from the emotional factors, there are two sides to inheriting a property; it’s a great opportunity but it can also be hard work. So, if you’ve inherited a property, what can you do with it? The best option for you depends on your circumstances, but we have some options for you to consider.

Inherited property: your options

Before you make a decision on an inherited property, think about the different options open to you, including:

● Living in the property. The simplest of all your options; move in and start enjoying your new home. If you’ve already got a property, decide whether to sell it or rent it out and earn extra income.
● Rent out the property. Instead of living in it yourself, let someone else live in it by renting it out to tenants. It’s a great way to generate an income but go in with your eyes open as it comes with certain responsibilities, like finding tenants, collecting rent, dealing with repairs and keeping up with the maintenance.
● Sell the property. If the above two options don’t appeal to you, sell the property. Yes, you’ll hopefully make money but bear in mind you’ll need to pay Capital Gains Tax (CGT) on any profit you earn.

Whatever you decide to do with your new property asset, you must get professional advice. There are two important people you’ll need, a solicitor to help you handle the legal aspects of your inheritance and an accountant to manage the tax implications.

Making a decision: what to think about

Before you jump in, here are some points to consider first:

● Your personal circumstances. Questions to ask yourself: do you need a place to live? Do you want to generate an income? Do you need to raise money?
● The condition of the property. Assess the property by asking: is the property in good condition? Will it need repairs or renovations?
● The location of the property. Consider: is the property in a desirable location? Will it be easy to find tenants?
● The value of the property. The six million dollar question: how much is the property worth? Will you have to pay CGT if you sell it?

Think about your answers to these questions, and others, before you make a decision that affects you and your family.

What to do with an inherited property: extra tips

Here are a few extra tips when it comes to what to do once you’ve inherited a property:

● Get a valuation. If you don’t know what it’s worth, how can you make an informed decision about what to do with your inherited property?
● Check the title deeds. Make sure you’ve got the property’s original title deeds which detail who owns the property and the rights they have.
● Check for any outstanding debts. Are there any outstanding debts on the property, like a mortgage or a loan?
● What are the tax implications? You may have to pay inheritance tax on the property but an experienced tax adviser will be able to tell you more.
● Make a plan. Now you’ve got the information you need, you’ll be able to see the bigger picture and avoid any problems in the future.

If you’ve inherited a property, you may need to consider the implications for you and your family. So, we’re here to help you work out what’s best for you and those around you. Get in touch today.

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What Is Capital Gains Tax in the UK?

When you sell an asset that has increased in value, such as property, cars or even shares, you will have to pay a tax on the profit, called Capital Gains Tax (CGT). In the UK, the current CGT rates are 10% or 20% for individuals (not including residential property and carried interest).

Why do you need to pay CGT?

If you’ve sold an asset which had increased in value and the gain, or profit, is greater than your annual CGT allowance – this is currently £12,300 for the 2022/23 tax year – you will need to pay CGT on the difference. 

If the gain is less than your annual allowance, you don’t need to pay CGT but you will still need to report the gain on your next tax return. 

When don’t you need to pay CGT?

If you’ve sold an asset which had increased in value and the gain, or profit, is greater than your annual CGT allowance – which for the 2022/23 tax year is £12,300 but will drop to £6,000 for the 2023/24 tax year – and you will need to pay CGT on the difference between your annual personal CGT allowance and the sale price.

If the gain is less than your annual allowance, you don’t need to pay CGT but you will still need to report the gain on your next tax return.

Meeting about tax

How to calculate your CGT bill

To calculate your CGT bill, you need to know how much your gain (profit) is by subtracting the original cost of your asset from the sale price.

For example, if you bought a share for £100 and then sold it for £150, your gain would be £50.

Now you know your gain, apply the relevant tax rate to calculate how much CGT you will need to pay. For the 2022/23 tax year, outlines the CGT rates as:

● 10% and 20% tax rates for individuals (excluding residential property and carried interest)
● 18% and 28% tax rates for individuals for residential property and carried interest
● 20% for trustees or for personal representatives of someone who has died (excluding residential property)
● 28% for trustees or for personal representatives of someone who has died for the disposal of residential property
● 10% for gains qualifying for Business Asset Disposal Relief (previously known as Entrepreneurs Relief)
● 28% for Capital Gains Tax on a property where the Annual Tax on Enveloped Dwellings is paid, the annual exempt amount is not applicable
● 20% for companies (non-resident Capital Gains Tax on the disposal of a UK residential property)

As you can see the rates vary depending on whether you’re an individual or a business and what it is that CGT may apply to. If you’re unsure what rate your gain is subject to, we’re always here to help.

How to pay CGT

How you report and pay your Capital Gains Tax depends on whether you sold a residential property in a residential property in the UK on or after 6 April 2020 or any other asset that’s increased in value in the time between purchasing and selling it.

To report your gain you’ll need to know:

● how much you bought and sold the asset for.
● when you bought and sold the asset.
● any other relevant details, like any costs associated with the purchase, improving the asset and any tax reliefs you’re entitled to.

Here to help

CGT can be a complex and confusing tax but to make sure you’re paying the right amount, it’s important to understand how the tax works. That way you will avoid paying more tax than you need to.

If you’re planning on selling an asset that has increased in value but are unsure whether you need to pay CGT, or how much CGT you owe, our experienced, professional tax advisers at Norwich Accountancy are on hand to help you.

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