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:-
- 28%* on your gains from residential property
- 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
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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