Capital gains tax (CGT) was one of the revenue-raising measures in the Chancellorโs budget.
CGT is paid by investors, business owners, and property owners who make a profit when selling a buy-to-let or holiday home. It is levied on the profit when investments are sold, and investments subject to it include second homes as well as stocks and shares.
It is charged at rates which depend on two factors; the nature of the asset being sold, and the rate of income tax you pay.
There were fears that the Chancellor would equalize capital gains tax with income tax -which would mean taxes rising as high as 45%. Her budget did not go that far, but simply increased the rate โ and only for investments other than property.
The new rate of Capital Gains Tax for basic rate taxpayers goes from 10% to 18%, while the rate for higher rate taxpayers rises from 20% to 24%. Capital gains tax on residential property remains unchanged at 18% and 24%.
What will these increase mean to you -and can you mitigate them?
How CGT works
Capital gains tax is charged on the profits made when certain assets are sold or transferred to someone who isnโt a spouse or civil partner.
If all gains in a tax year fall within the CGT allowance (currently ยฃ3,000), there is no tax to pay.
However, when you make gains above the annual allowance, CGT on stocks and shares is charged at the appropriate rate and collected as a result of tax return.
But there are ways to reduce your liability.
1. Use your annual allowance
Like the ISA allowance, the annual CGT allowance works on a use-it-or-lose it basis, so it is important to use it each year. If youโre building up a big gain, this means if you can realise it over a period of years, ยฃ3,000 at a time, you pay no tax.
2. Offset your lossesย
You may have losses on some investments and gains on others in any given year. When you complete your tax return, you can add details of the losses youโve made, which will be offset against the gains when youโre calculating how much CGT you owe. In some cases, this may bring the CGT bill down to zero โ it should certainly reduce what you owe.
If you claim for losses which exceed your gains you will be able to carry them forward into next year, to offset against any gains you make then.
3. Plan your tax band
If you expect to earn far less income next year and be in a lower tax band, perhaps because you will be retiring, it makes sense to delay cashing in your investments. You could pay less tax but be sure your investment income wonโt push you back up into a higher bracket.
4. Use a stocks and shares ISA
ISAs are exempt from CGT completely. If youโre buying new shares or funds, consider buying them with your stocks and shares ISA.
If you have assets outside an ISA, you can use the Bed & ISA process to sell assets outside an ISA โ within your ยฃ3,000 CGT allowance - and move them into the ISA wrapper. Some Investment platforms offer this service, where they take care of the selling and buying for you, usually for one fee.
5. Pay into a pension
Pensions remain free from capital gains tax. The rules allow us to put in up to a whopping ยฃ60,000 a year or 100% of your income if you earn less than ยฃ60,000 per year, so there may be some logic to contributing whatever spare cash you can this tax year [in case] anything changes.
Pension savers also benefit from tax relief, giving your nest egg an extra boost.
6. Plan as a couple
If youโre married or in a civil partnership, you can transfer the ownership of some assets to your spouse or civil partner. Thereโs no CGT to pay on the transfer. Your spouse will have their own allowance- which you can use โ and you save if theyโre taxed at a lower rate, because they may also pay any CGT at a lower rate too.
7. Get an expert on your side
All tax is complicated, and finding the most appropriate strategy to minimise your CGT liability can be a great deal easier if you can call on a financial expert.
So if the CGT increase is going to affect your financial plans, you can call on the expertise you need here at Continuum.
The information contained in this article is based on the opinion of Continuum and our understanding of current HMRC tax rates and does not constitute advice on a suitable taxation strategy or investment strategy, you should seek independent financial advice before embarking on any course of action.
Levels, bases and reliefs from taxation are subject to individual circumstances and may be subject to change.
The Financial Conduct Authority does not regulate taxation advice.
A pension is a long-term investment; the fund value can go down as well as up and this can impact the level of pension benefits available. Pension Income could also be affected by interest rates at the time benefits areย taken. Pension savings are at risk of being eroded by inflation.
The value of an investment can go down as well as up and you may get back less than you invested. When investing Capital is at risk.
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