Strategies to minimize your capital gains tax liability
UK Labour Government Increases Capital Gains Tax Rates
In a bid to bolster revenue, the current Labour administration has raised capital gains tax (CGT) rates, potentially escalating the financial implications for individuals selling or transferring assets.
The changes indicative of the new legislation involve an increase in the lower rate of CGT from 10% to 18%, with the higher rate hiking from 20% to 24%. These amendments align the principal CGT rates with those applied to the sale of second homes.
Although a separate guide delves into the workings of capital gains tax, this piece presents strategies to minimise the financial impact on taxpayers.
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Some strategies to reduce your CGT bill may include:
- Thoughtful Tax Planning
Given your discretion in choosing the timing of capital gains, reviewing your overall tax position is advisable. Investors' income can fluctuate year by year, making it prudent to defer the sale of an asset if you anticipate a lower tax bracket in the following years, as this could translate to a lower CGT rate. Conversely, selling assets during high-income years may be advantageous if you expect tax rates to rise.
- Optimizing Your Annual Allowance
Each year, individuals can take advantage of a specific amount in capital gains before any tax is levied, referred to as the CGT allowance. In April 2023, this allowance is set to decrease from £12,300 to £6,000, further dropping to £3,000 in April 2024. To maximise savings, consider realising gains incrementally over several years. By capping annual gains at the allowance level, tax liability can be minimised.
- Offsetting Losses
In some instances, losses accrued from specific investments can be offset against gains made from others in the same tax year. For example, if you realise a gain of £10,000 in investments but also have losses of £3,000, you would only be taxed on a gain of £7,000, further reduced by the annual allowance if applicable.
- Utilising Losses from Previous Years
In scenarios where you don't use your losses within the respective tax year, they can be carried forward to future tax years. However, ensure that you register the losses with HMRC within four years following the tax year in question.
- Employing Individual Savings Accounts (ISAs)
ISAs provide a platform for avoiding CGT entirely, with up to £20,000 per annum in investments remaining tax-free. No income tax is levied on investments within an ISA, either, offering additional benefits.
- Implementing a 'Bed & ISA' Transaction
This strategy involves selling existing assets and reacquiring them within an ISA gradually, ensuring only gains of £3,000 per year (the equivalent of the annual CGT allowance) are realised. Since these assets will be held within the ISA, the remaining CGT liability can be eradicated.
- Contributing to a Pension
Pensions are an efficient method of saving for the future, as any income or gains generated within a pension wrapper are exempt from tax. Furthermore, pension tax relief is payable at your marginal rate, providing additional savings on contributions.
- Leveraging Workplace Share Schemes
Workplace share schemes can be valuable, with CGT savings possible if you transfer the shares into an ISA within 90 days of the scheme maturing, provided the shares are valued less than your annual ISA allowance of £20,000.
- Planning as a Couple
Married or civil partners can reduce their CGT bill by transferring the ownership of certain assets. No CGT is payable on the transfer, and your spouse's unused allowance can be utilised if you have reserves.
- Investing in CGT-Free Assets
Diversifying your portfolio to include CGT-free assets, such as gilts or venture capital trusts (VCTs), can offer tax-efficiency benefits. Gilts, issued by the UK government to finance public spending, provide regular interest payments and principal repayment at maturity, with low risk due to the government's strong credit standing. VCTs, though risky, offer tax savings on contributions and income tax relief on gains.
- The increased capital gains tax (CGT) rates could encourage individuals to reconsider their personal finance strategies, possibly diversifying investments into personal-finance tools such as individual savings accounts (ISAs) or pensions.
- By contributing to a pension, taxpayers can take advantage of tax-exempt income and gains, potentially shielding themselves from the impact of elevated CGT rates.
- Given the revamped CGT landscape, it may be prudent for taxpayers to explore alternative investment opportunities, like bonds or venture capital trusts (VCTs), which provide CGT-free or tax-efficient benefits.
- The rise in capital gains tax rates highlights the significance of careful tax planning, such as offsetting losses or maximizing annual allowances, to reduce the financial burden associated with CGT.
