Cut your CGT bill

If you sell any investments that were not held in a pension fund or an ISA (Individual Savings Account), you could be liable for capital gains tax (CGT) on your profits. The same goes for sales of a buy-to-let property or, indeed, any property which is not your main residence. So you may wish to consider taking the following steps before the end of each tax year to reduce any CGT liability.

1. Utilise your CGT allowance

The annual CGT allowance remains the most valuable, yet underused, opportunity to minimise the impact of the tax on your investments. It’s available to all individuals and the allowance is £12,000 for 2019/20. Use it or lose it, as this allowance cannot be carried forward to future years.

Gains in excess of the annual allowance are charged at 10% or 20% depending on your other income. If your taxable income and your taxable gain added together put you over the higher rate tax threshold, you’ll pay the basic rate (10%) on gains up to the threshold, and the higher rate (20%) on the rest. (These rates are 18% and 28% for residential property).

The strong stock markets run since the financial crisis means that many investors could be sitting on healthy gains. Therefore, it could be advisable to crystallise these gains up to the limit of this year’s CGT allowance, in order to reduce the risk of incurring a significant CGT bill in future years. Those with larger liabilities might look to straddle a disposal across tax year-end to make use of two annual exemptions.

2. Transfer assets to your spouse or civil partner

If you have a spouse or civil partner who is not using their allowance, you can transfer assets which have grown in value, to them – a procedure that is not subject to CGT. If you both then sell assets before the end of the tax year, you can effectively make use of the CGT allowance for both individuals.

Transferring assets to a lower-earning spouse may also create an opportunity to reduce the overall rate of CGT, as your spouse may be able to utilise their basic rate band so that CGT applies at 10% rather than 20%.

3. Invest in an ISA

By crystallising capital gains each year up to your allowance, you can reduce the risk of larger tax bills in the future. Better still, by reinvesting the proceeds into tax-efficient wrappers, such as ISAs, you will not incur any future CGT liability on those gains.

That’s why it makes sense for investors, particularly higher rate taxpayers, to make the maximum possible use of their ISA allowance each year. Over many years, some investors have built up multiple six-figure sums in ISA wrappers by maximising their annual allowance.

4. Pay into a pension

There is no further liability to CGT when money is invested in a pension. But there are further benefits of paying into a UK-registered pension scheme.

A pension contribution extends the upper limit of a higher earner’s basic rate Income Tax band by the amount of the gross contribution. So, by making a pension contribution, any tax on a capital gain realised in the same tax year can potentially be reduced from 20% to 10%.

For example, if an investor is able to make a gross pension contribution of £10,000, the point at which the higher CGT rate becomes payable will increase from £46,350 to £56,350. If the capital gain falls within the extended basic rate band, the CGT liability will become 10% instead of 20%.

5. Make use of losses

Of course, selling investments can lead you to realise losses as well as gains, and these losses can be offset against gains. So, if your gains are going to exceed your annual CGT allowance, you could sell an investment standing at a loss. The crystallised loss could then be used to reduce your gain to within the CGT annual allowance, thus reducing or even eliminating any CGT liability.

6. Give shares to charity

If one gives land, property or qualifying shares to a charity, or sells them to a charity at less than the market value, income tax relief and CGT relief are available.

7. Invest in an EIS

Any gains that are made on investments in an EIS (Enterprise Investment Scheme) are free from CGT if held for three or more years.

CGT deferral relief is available to individuals and trustees of certain Trusts. The payment of tax on a capital gain can be deferred where the gain is invested in a share of an EIS qualifying company. The gain can arise from the disposal of any kind of asset, but the investment must be made within the period of one year before, or three years after, the gain arose. There is no minimum period for which the shares must be held; the deferred capital gain is brought back into charge whenever the shares are disposed of, or are deemed to have been disposed of under the EIS legislation.

The downside of EIS is that generally these types of schemes are higher risk than traditional stocks and shares.

8. Chattels that escape CGT

Possessions such as antiques and collectibles are called chattels. Gains on some are tax-free. Items with a predicted life of 50 years or fewer, known as ‘wasting assets’, are CGT-free, provided they were not eligible for business capital allowances. Jewellery and vintage cars are treated as ‘wasting assets’. Pleasure boats and caravans also fall into this category.

If the gain is not tax-free, CGT is charged in a special way. The taxable gain is the lower of the actual gain or five-thirds of the excess of the final value over £6,000.

For example, if you sell an antique clock for £7,000 which you originally bought for £5,000, the actual gain is £7,000 - £5,000 = £2,000. The gain under the special rules is 5/3 x (£7,000 - £6,000) = £1,666. Since this is lower, your taxable gain is £1,666.

If you would like to discuss any of these financial aspects that may affect you, please contact us.

This article is not intended to be financial advice. You should always seek independent financial advice before taking out any financial product mentioned in this article.