- 1 What Is Capital Gains Tax ?
- 2 Best Ways to Reduce CGT Rates
What Is Capital Gains Tax ?
Capital Gains Tax or CGT is the net profit someone makes after selling off, gifting, or transferring ownership of a capital asset, exceeding the price of purchase. Assets worth less than £6,000 are exempt from CGT. The entire sum earned by selling a capital asset becomes taxable income. CGT is not applicable to inherited property. A few examples of assets on which CGT is applicable are mutual funds, jewelry, land, houses, and buildings.
There is a personal CGT allowance for each individual, every year (6th April to 5th April). This allowance is sufficient enough to help one avoid a CGT liability. Gains made beyond the allowance amount are charged to CGT at either 18% or 28%, depending on the taxable income of the individual in the year that the profits arise.
Below are ways in which you could try to reduce or avoid the CGT altogether.
Best Ways to Reduce CGT Rates
1. Use the CGT Allowance
As an investor, every person is given a CGT allowance of £11,000 on the gains on investments, every year. This amount is tax-free. However, it is not possible to carry forward this amount into the next year, if unused. It is therefore advisable to make use of this tax-free allowance per year, in order to reduce your CGT bill.
2. Make Use of Losses
You could consider selling a few assets at a loss if the cumulative gain exceeds the allowance for that taxable year. Once the gains and losses are marked in a ledger, they will offset each other and the amount of gain subject to tax will be reduced.
3. Transfer Assets to your spouse or civil partner
You can transfer your assets to either your spouse or your civil partner. This will ensure that you both can use your individual CGT allowance, thereby doubling the overall allowance of a couple.
4. Bed and spouse
As an investor, you’re not allowed to sell and then buy the same share back within 30 days. Here is where you can sell a share and get your spouse to buy it back immediately. This gain is then realized CGT free and the family can keep their assets as well.
5. Invest in an ISA
Similar to bed and spouse, you can invest in an individual savings account or ISA, to realize a capital gain and then buy back the same assets within an ISA. This will make all further gains on the asset to be CGT free. Gains and losses within an ISA are not eligible for CGT, so married couples or civil partners can also make use of this.
6. Contribute to a Pension
A pension contribution reduces the tax on a capital gain to 18% from 28%. In the event that the capital increase, once added to the taxable income in the year the addition is acknowledged, falls inside the all-encompassing individual recompense, the CGT obligation will become 18% rather than 28%.
7. Give to Charity
If you decide to give or sell any assets such as land, or shares to a charity at less than the value in the market, you are eligible for relief on your income tax as well as on the CGT.
8. Invest in EIS
Any additions that are made on interests in an EIS (Enterprise Investment Scheme) are free from CGT whenever held for at least three years.
CGT deferral help is accessible to people and Trustees of specific Trusts. The tax payment on a capital addition can be conceded where the gain is invested into a portion of shares of an EIS qualifying organization. The gain can emerge from the removal of any sort of resource, and this should be done within the time of one year prior or three years after the gain emerged.
There is no base period for which the offers should be held; the conceded capital addition is brought once again into charge at whatever point the offers are discarded, or are considered to have been discarded under the EIS enactment.
The disadvantage of EIS is that for the most part, these kinds of plans carry a higher risk than customary shares.
9. Hold over Relief
Hold over relief can be claimed once the chargeable gain is postponed until the transferee disposes of the assets. It is usually claimed for:
- gifts of business assets
- gifts of unlisted shares in trading companies, etc.
- certain types of gifts that are specifically exempted from IHT
- gifts of agricultural land
- gifts which are chargeable transfers for inheritance tax (IHT) purposes
10. Chattels that Escape CGT
Assets, for example, collectibles and antiques are called chattels. Gains on some are tax-exempt. Things with an anticipated existence of 50 years or less, known as ‘wasting assets’, are sans CGT, if they were not qualified for business capital remittances. Old fashioned antique clocks and vintage vehicles are treated as ‘wasting assets’, as are pleasure boats and caravans.
As illustrated, there are various ways one can reduce or nullify the CGT. However, make sure to refer to the taxation guidelines for the current financial year and gain proper knowledge before deciding to take a step further.