Let’s face it, we’d all be happy to pay less tax. And with a bit of careful planning and a great financial adviser on the case, you can limit your tax liabilities. Capital gains tax (CGT) is a prime example.
CGT is a tax that may be charged on the profit (or gain) made when selling or disposing of an asset. Some assets, like your home and personal belongings worth less than £6,000 are exempt. But things like shares, investments and second properties that generate capital are generally subject to CGT.
The good news is that it’s a tax with lots of reliefs and exemptions. But it can be complicated. Calculating gains and losses, and dealing with complex rules around portfolio rebalancing and fund switching, can mean you pay unnecessary levels of CGT. That’s where getting some professional advice really pays off!
We’ve summarised a number of ways that you could potentially reduce your capital gains tax bill. There are yet more options that we’ve not touched on here, so whilst we encourage you to read and take note, we also encourage you to give us a call and arrange an appointment if you’re serious about reducing your CGT bill.
1. Maximise use of the annual exemptions
Every individual has an annual CGT allowance which allows you to make gains of up to £11,700 per year (2018/19) tax free. This allowance can’t be carried forward, so use it or lose it!
One way you can make the most of this is by making partial withdrawals each year.
If you’re planning on selling off a lump sum, it can pay to sell shares in two tranches spread either side of the new financial year to make the most of two annual exemptions. A bit of planning can go a long way.
2. Maximise use of losses
When calculating your CGT bill, you may have the ability to deduct capital losses from capital gains to arrive at your net gain. By realising losses in poor-performing funds in the same tax year as taking gains from good-performing funds you can reduce the amount of gain that is subject to tax. In most cases, losses made up to four years ago can be offset against current gains.
3. Use exempt wrappers
Any gains made through ISAs, pensions and investment bonds avoid capital gains tax altogether. So they can be a good investment option.
One option to bear in mind is selling assets (such as shares) to produce a capital gain and then immediately buying back the same assets inside the safety of an ISA. This enables all future gains on this asset to avoid CGT.
You can do a similar thing using a Self-Invested Personal Pension (SIPP). All income and gains made inside a SIPP are tax-free, making it a popular option for saving towards retirement.
4. Get your spouse or civil partner involved
Transfers to your spouse are currently exempt from capital gains tax. Doing this can enable you to use both of your annual allowances, effectively doubling the amount of profit you can take tax-free.
But there are other ways to work as a team too. In the past, you could sell and then buy back the same shares straight away. There’s now a 30-day cooling off period that prevents you from doing that.
But if one of you owns shares and sells them in the market (creating the gain and making use of some of your allowance), your spouse or partner can repurchase immediately (thus avoiding market price movement) and can transfer back to you at a later date. Essentially, the gain is realised CGT-free, while enabling the family to retain the assets.
5. Switch asset class
As outlined above, you can’t sell and then buy back the same shares within 30 days – or shares within the same class. But there are types of investment that are nearly identical but fall under different classes for the purposes of CGT.
One option then might be to sell enough from one tracker (which is showing good returns) to make the most of your annual exemption and realise the gains, then use the proceeds to invest in a different tracker with similar specification and level of potential return.
6. Consider your principle private residence election
If you’re lucky enough to own more than one property, there are a number of options to consider.
You can elect which property should be treated as your main residence for tax purposes. Consider this carefully based on the likely increase in market value of the properties. Bear in mind that where a property has been your main residence at any time, the last 18 months are exempt from CGT.
If you live in a property as your main home for a time before letting it out, you may be able to reduce the CGT bill when you come to sell it.
If you’re unmarried partners, you can each nominate a different home as your main home, allowing you to get tax relief on them both.
7. Invest in small companies
Happy to take a bit of a risk? You can invest in special tax-efficient programmes known as Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EISs) which provide funding to small businesses. This can entitle you to reclaim some (if not all) of the CGT you’ve previously paid.
Because of the level of risk involved, this is usually best left to very wealthy and experienced investors.
8. Reduce your taxable income
Capital gains tax is charged based on the rate of income tax paid. Reduce your taxable income and you might just reduce your CGT rate too. Salary sacrifice in the form of pension contributions, childcare vouchers or deferring the state pension could all help.
9. Gift assets into a discretionary trust
Do this for inheritance tax planning purposes and you can claim gift holdover relief. That means any gains are passed to the trustee.
10. Take advantage of investors’ relief
This relief allows investors in unlisted companies to pay just 10% tax on gains made in the future. There are no restrictions on the size of company you can invest in. Shares need to be held for a minimum of three years. The lifetime limit is £10m.
If you’re directly involved in the business, the same reduced rate of 10% tax on gains applies through something called entrepreneur’s relief, which has its own set of rules.
11. Use the 7 year rule
If you acquired a property between 7 December 2011 and 31 December 2014, and continue to own it for at least seven years, you may be able to claim capital gains tax relief. If you’ve held the property for longer than seven years, a proportion of the gain which represents the seven year ownership period will be exempt from CGT.
12. Consider investments other than property
Any property you own, other than your primary residence, is subject to capital gains tax at either 18% or 28% (depending on your tax band). Gains on other investments are charged at 10% or 20%. So you can see, you’ll be paying a larger percentage of your gain if you invest in property. Diversification could be the key.
So, as you can see, there are lots of options available, depending on your status and a whole host of other variables. That’s why it really is best to get some help with this one. And now is a great time – there’s just enough time to maximise use of your annual exemption by selling your shares in two lots, one either side of April 5th – get in touch now!