6 ways to lower your capital gains tax bill
Capital gains tax (CGT) is catching more people unawares. Government receipts have tripled in the past decade. What can you do to ensure your safety?
In 2019-20 1,, receipts from capital gains taxes (CGT), reached GBP 9.8 trillion. This is a significant increase from the GBP 2.5 billion received ten years earlier. It also highlights the high tax bills investors may find when incashing out on their portfolio of investments.
CGT is applied to gains when capital assets are sold, transferred, or converted. This is the profit you can realize when you sell shares, funds, residential property, and other assets (but not your main residence).
Everybody, even children, is entitled to an yearly CGT (capital gain taxes) exemption. The current allowance is GBP 12,300 but it will be frozen at that level until 6th April 2026. If your capital gains in this tax year, or in any of the subsequent four tax years, are under that amount, then you won’t pay tax.
Gains above an yearly exemption will be charged 10% or 20%, depending on your income 4. The government policy can also be changed.
What can you do to reduce your CGT bill? Here are some tips.
1. Use your available allowance
£ 12,300 is an “use it or loose it” allowance that you cannot carry over to upcoming years. Remember that each person has their allowance. A married couple could potentially make gains of £ 24,600 in this tax year, without any tax liability.
You can transfer assets between spouses or civil partners tax-free in most cases. It might be worth looking into transferring holdings to someone who is lower taxed or has not used their allowance.5.
2. Any losses should be offset by gains
Gains and losses that are realized in the same tax year must be offset. This can reduce the tax liability. You can carry your losses forward in order to offset future gains if they exceed your gains.
3. Opt for a fund that is all-in-one
Multi-asset funds like our LifeStrategy funds do not have to pay CGT for gains when the fund itself sells its holdings. This is because the fund trading, and not you. Tax costs may apply in other countries. These are paid out of ongoing charges or OCF.
After taking into account your annual allowance, however, CGT may be payable on gains you make when you sell shares in the fund.
You should also consider the possibility of accumulating a large capital gain that exceeds the annual CGT exemption. You can reduce this risk by using your yearly allowance to release a portion of your holdings at the end each tax year, and then buying it back. This will reset your holding’s cost and reduce the profit against which future CGT liabilities can be calculated.
You must wait for 30 days to purchase the same holding back under tax rules. If you are not comfortable taking on this risk out of the market, an exchange-traded fund (ETF), which offers similar exposure, may be an option.
Another strategy is to realize a gain in a common account and use the proceeds for unused pension allowances or ISA allocations. These are also called ‘Bed and SIPP’ or ‘Bed and ISA’ and can be used to move your investments into a tax-advantageous situation.
Investors should speak to their financial advisor as the rules regarding selling and buying back shareholdings are complex.
4. Manage your annual taxable income levels
Your income tax band determines the rate of CGT that you pay. Therefore, lowering your income tax rate could have an impact on your CGT.
You can reduce your taxable income by making charitable donations or pension contributions.
5. SEIS and EIS scheme
Investments like the Enterprise Investment Scheme (EIS), and the SEIS let you reinvest the proceeds from assets subject to CGT. You can also defer taxation on capital gains, potentially for as long as you plan. These investments also offer income tax relief at 30% (EIS), and 50% (SEIS). These investments come with high risks and are not liquid. You won’t be eligible for full Income Tax Relief if you don’t have enough income to cover the reinvested capital gains. They are not for everyone.
6. Use your annual ISA allowance
It amazes me, yet again, how few high-net-worth investors use their ISA allowances. Many people don’t realize that the current allowance is £ 20,000, and that personal capital gains are exempt from tax on ISA investments. Whereas others simply don’t know how to do it.
However, I see diligent investors who have ISA portfolios exceeding £ 500,000 and who have understanding all fineness regarding CGT.
Capital gains tax is something you must pay if you feel you may be subject to it. You can cut your bill with careful planning and make the most of all the allowances and reliefs available.
2 It’s £6,150 in the case of trusts. For more, see here.
3 See page 51 of 2021 Budget red book.
4 Residential property is taxed differently. In most cases, your family home is CGT-exempt. However, profits made on second homes or property investments are not and are liable to CGT of either 18% or 28%, depending on your other income.
5 In most cases you can transfer to a spouse or civil partner without incurring CGT. However, you may be liable if you separated and did not live together at all in a tax year.