Capital Gains Tax (or CGT) is a tax on the gain or profit you make when you sell, give away or otherwise dispose of an asset. It applies to assets that you own, such as shares or property. It is payable at a rate of 18% if you are a basic rate taxpayer and 28% if you are a higher or additional rate taxpayer when you sell an asset and make a ‘chargeable gain’. This is when the value of an asset has gained in value since you bought it. CGT is not charged on the asset itself but on how much it has increased in value.
How To Reduce Your Capital Gains Tax Bill
Below, we have identified a number of ways to help ensure that when the financial year comes to an end, your CGT bills will be kept to a minimum:
- Utilise Your ISA Allowance
You do not have to pay any CGT on any gains from an ISA (Individual Savings Account). This may result in a significant saving if your gains exceed the current £10,900 CGT allowance.
- Split Investments
Transfers between married couples are tax-free. This means that if one partner is a basic rate taxpayer, whilst the other partner is a higher rate taxpayer, the option exists to transfer some of their assets so that if some of them are sold, CGT will be payable at the lower rate.
You can also optimise your CGT allowances by transferring some of your investments into your spouse’s name before selling. This can be done to ensure that neither partner exceeds their annual CGT allowance, thus avoiding any CGT liability.
- Using the Annual Exemption
Currently the annual exemption stands at £10,900 for the 2013-14 tax year and because this exemption cannot be carried over into the next financial year, it should be used wherever possible.
Look at your assets and see if you can sell any at a profit to use up the annual exemption. Please be aware that any losses in the same tax year must be utilised against gains of that year before applying the annual exemption.
- Offset Losses
If your current profits exceed the annual exemption, it may be worth considering selling some assets at a loss. This will then reduce the chargeable amount because you will be able to set off losses against same year gains.
Please be aware that you may waste part of the annual exemption, so plan carefully. This will be particularly beneficial if your gains are chargeable at the higher rate of 28%.
- Invest in Small Companies
The government has created a number of special tax-efficient programmes which are designed to provide funding to small businesses. Participation in these programmes will allow you to reclaim some, if not all, of the income tax and CGT you have previously paid.
These schemes, known as Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EISs) are generally considered to be a risky proposition and should only be entered into by experienced and wealthy investors.
- Get Your Timing Right
Wherever possible you can also look to spread sales over two tax years if there are several assets that you wish to sell at a profit, rather than sell altogether. This will also defer the tax by twelve months.
For example, selling some shares in the 2013/14 tax year before 5th April 2014 and then selling additional shares on or just after the 6th April will allow you to take advantage of two years’ worth of CGT allowances as opposed to just a single year by selling them all on the same day.
If you make an overall capital loss in a year, you can carry this forward in order to reduce your capital gains in future years when you might otherwise be liable for tax. This can only be done, however, if you have notified HMRC of the loss on your self-assessment tax return.
