You may never have considered the risk that Capital Gains Tax (CGT) potentially presents to your money.
However, according to statistics published in FTAdviser, HMRC collected record amounts of CGT in the 2019/20 tax year, totalling £9.9 billion.
CGT may sound exclusively like an issue for the super-rich, and to some extent it is – just 265,000 people contributed to the £9.9 billion tax receipts.
However, if you own shares that aren’t in an ISA or have physical assets that you intend to sell at some stage, including buy-to-let (BTL) property, you may find yourself subject to CGT when you come to cash in on them.
That’s why it’s important to understand what CGT is and how to mitigate it.
CGT is a tax on a rise in the value of your assets
Simply put, CGT is the tax charged on the rise in the value of your assets.
For example, imagine that you bought a painting for £100,000 20 years ago. You might have that painting valued this year and find that it’s now worth £125,000, a gain in value of £25,000.
Therefore, if you then sell this painting, you’d potentially owe CGT on that £25,000 rise in value, rather than on the entire £125,000 value.
CGT rates start at 10% for basic-rate taxpayers, and 20% for higher- or additional-rate taxpayers.
There’s an extra 8% charge on top if you’re selling BTL property, meaning charges are 18% and 28% respectively.
Your annual CGT annual exempt amount
Each tax year, you do have a CGT annual exempt amount up to which there’s no CGT due. As of the 2021/22 tax year, this tax-free allowance is £12,300.
So, for that same example of the painting, your CGT annual exempt amount would essentially remove £12,300 of the gain from being taxed. As a result, you’d potentially owe CGT on just £12,700 of your gain.
Ordinarily, the CGT annual exempt amount is supposed to rise in line with the Consumer Price Index (CPI) each tax year.
However, in the 2021 spring Budget, chancellor Rishi Sunak announced plans to freeze the CGT allowance at its current level until 2026.
This measure is part of the plan to help pay for the extra public spending as a result of the Covid-19 pandemic.
5 ways to mitigate CGT
No matter how much money you have, CGT could prove to be an issue for you. Whether you have a BTL property portfolio, or you’re a retail investor trading stocks and shares, you could see your profits reduced by a CGT charge.
That’s why it’s worth considering methods that can limit how much CGT you owe.
1. Make the most of the CGT annual exempt amount each year
The first method you could consider for mitigating CGT is by maximising your full CGT annual exempt amount each tax year.
If you have shares, assets, or property that you want to sell, consider selling them up to the annual exempt amount each tax year.
Over time, this could reduce the potential CGT that you might owe if you tried to sell all these assets in a single tax year.
2. Transfer assets to your spouse or civil partner
As well as using your own CGT annual exempt amount, you could consider transferring assets to your spouse or civil partner.
Each individual has their own CGT exemption to make use of, and there’s generally no tax penalty for transferring assets into your spouse or civil partner’s name.
You can effectively double your CGT exemption each tax year using this method.
3. Use your ISA allowance
If you hold investments such as stocks, shares, bonds, or gilts, holding them in an ISA makes all gains entirely free from CGT.
Each tax year, you have an ISA allowance, which for the 2021/22 tax year is £20,000. ISAs are called “tax-efficient” as there’s no Income Tax or CGT due on any gains in value.
Holding your investments in an ISA allows you to buy and sell investments without having to worry about CGT at all.
4. Draw income efficiently
As your rate of CGT is determined by your marginal rate of Income Tax, you could potentially reduce a CGT bill by drawing your income efficiently.
For full-time workers, this is less of a possibility, as your salary will likely define your Income Tax rate. But, if you’re retired, you could carefully withdraw income so that you only pay basic-rate Income Tax.
In turn, this could reduce a potential CGT bill by up to 10%, even if you were selling BTL property.
5. Work with a financial planner
If you’re unsure of your current CGT position, it may be a good idea for you to take financial advice from a professional financial planner.
A financial planner can advise you on the best methods for mitigating a potential CGT bill in your position.
They can also create a tax-efficient financial plan for you that means you’re able to keep as much of your money as possible.
Speak to us
If you’d like to find the best methods in your circumstances for mitigating CGT, please get in touch with us at Britannic Place.
Email [email protected] or call 01905 419890 to find out more about how we could help you.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.