Capital gain tax is a tax levied on an asset when it is sold, transferred, or exchanged. These assets include property that isn’t your primary residence, personal possession worth at least £6,000, shares, and collective investment funds.
High-rate taxpayers pay a capital gains tax of 28% on profits from residential property and 20% on profits from investments. For basic-rate taxpayers, the CGT rate is much lower at 18% and 10%, respectively.
There are several ways you can save on your capital gains taxes and ensure you get more disposable income from your assets. However, capital gain tax laws are complex, and without consulting any property accountants, you may end up money that could have been saved.
How to Avoid Capital Gains Tax
In this guide, we will show you some simple ways how you can reduce your CGT liability.
Take Advantage of Your Capital Gains Tax Exemption
Every individual is allowed a capital gains tax exemption of up to £12,300 worth of investment without paying any tax. If you do not take advantage of this allowance, you won’t be able to carry it forward to the next year. Therefore, it is a good idea to use this tax-free allowance every year in order to minimize your risk of getting a big CGT bill in the coming years.
Balance the Gains Against the Losses
You can also reduce your CGT liability by making use of assets disposed of at a loss. The good news is that losses can be carried forward from the previous years to balance against the profits made in the future years.
For example, you want to sell a house that can incur a significant amount of CGT. You can offset this cost by showing other assets that have depreciated in value, such as poor-performing shares. This can help reduce your CGT
Gift Assets to Your Significant Other
CGT does not apply in the case of the transfer of assets between spouses or civil partners, which means partners can benefit from the CGT allowance granted to both of them, which stands at a total of £24,600.
However, keep in mind that you do consider the property an absolute gift without any pretensions.
Investments in Individual Saving Accounts
Any profit or loss incurred in an individual saving account is exempt from capital gains tax. So for high-rate taxpayers, it is a smart idea to make the most use of their ISA allowance, which allows them to invest up to £20,000 in their ISA without having to pay tax. For spouses and civil partners, the ISA allowance is effectively doubled to £40,000.
You can also make use of the “bed and ISA” tactic, which involves selling assets to realize a capital gain and then buying it back on the same day in your ISA. This will ensure that the CGT will not apply to all future profits on the assets.
However, you will still need to pay stamp duty and other costs when repurchasing your ISA investment, and there is a risk that any time out of the market might impact your investment.
Pay Into a Pension Fund
One of the most effective ways to reduce your CGT liability is to make a contribution to your pension fund since it will increase the upper limit of your basic income tax bracket. For example, if you contributed £10,000 to your pension fund, the income tax bracket will increase from £50,270 to £60,270 for the 2022-2023 tax year. If your capital gains and other taxable income fell within this extended bracket, only 10% tax will apply to your capital gains instead of 20% for the higher income tax bracket.
Contribute Shares to Charitable Organizations
If you dedicate a property or asset share to a charity, it can help you avail of both income tax and CGT relief. By contributing to charity, you can increase your basic income tax band once again and allow your capital gains tax to drop to a lower rate.
Invest in Venture Capital Trusts and Enterprise Investment Schemes
If you are in for some risk, you can take part in special tax-efficient schemes which provide funds to small businesses and startups. These programs can help you reclaim some if not all of your CGT.
However, venture capital trusts and enterprise investment schemes are usually very risky, so we suggest you only try this tactic if you are a seasoned investor. It is a good idea to talk to a property accountant before you dive into these investment schemes.
Holdover Relief on Gifts
You can take advantage of gift holdover relief if you sell certain assets for less than their worth. This means you are essentially selling your asset at a loss, and hence you will not be eligible to pay for CGT.
On the other hand, if your buyer sells the asset in turn, he or she will need to pay the CGT.
Capital gains tax is a very technical and complex subject, so it is important that you seek professional advice from chartered certified accountants and chartered tax advisers in London. An experienced property tax specialist can help you understand how CGT works, determine the best course of action based on your financial health and investments, and will maximize your tax savings.