Five ways to cut your CGT bill
There are some simple steps you can take to reduce the tax liability on your investment gains.
Given the range of tax-saving opportunities available to UK investors, you'd think few people would need to worry about Capital Gains Tax (CGT). But more individuals are being caught in the net and CGT receipts are forecast to exceed £10 billion in 2020/21.1
If you sell any investments that were not held in a pension fund or an ISA, you could be liable for CGT on your profits. The same goes for sales of buy-to-let property or, indeed, any property which is not your main residence. So, provided it makes investment sense, you may wish to consider taking the following steps before the end of the tax year to reduce any CGT liability.
1. Utilise your CGT allowance
The annual CGT allowance remains the most valuable, yet underused, opportunity to minimise the impact of the tax on your investments. It’s available to all individuals, including children, and is currently worth £11,700 (£12,000 in 2019/20). This is a ‘use it or lose it’ opportunity, so you can't carry your allowance forward to future years.
Gains in excess of the annual allowance are charged at 10% or 20% depending on your other income. If your taxable income and your taxable gain added together put you over the higher rate tax threshold, you’ll pay the basic rate (10%) on gains up to the threshold, and the higher rate (20%) on the rest. (These rates are 18% and 28% for residential property).
The strong run by stock markets since the financial crisis means that many investors could be sitting on healthy gains. Therefore, it could be advisable to crystallise these gains up to the limit of this year’s CGT allowance, in order to reduce the risk of incurring a significant CGT bill in future years. Those with larger liabilities might look to straddle a disposal across tax year-end to make use of two annual exemptions.
2. Transfer assets to your spouse or civil partner
If you have a spouse or civil partner who is not using their allowance, you can transfer assets which have grown in value to them – a procedure that is not subject to CGT. If you both then sell assets before the end of the tax year, you can effectively double the amount of tax-free realisable gains to £23,400.
Transferring assets to a lower-earning spouse may also create an opportunity to reduce the overall rate of CGT, as your spouse may be able to utilise their basic rate band so that CGT applies at 10% rather than 20%.
3. Invest in an ISA
By crystallising capital gains each year up to your allowance, you can reduce the risk of larger tax bills in the future. Better still, by reinvesting the proceeds into tax-efficient wrappers, such as ISAs, you will not incur any future CGT liability on those gains.
That’s why it makes sense for investors, particularly higher rate taxpayers, to make the maximum possible use of their ISA allowance each year. Over many years, some investors have built up multiple six-figure sums in ISA wrappers by maximising their annual allowance.
4. Pay into a pension
There is no further liability to CGT when money is invested in a pension. But there are further benefits of paying into a UK-registered pension scheme.
A pension contribution extends the upper limit of a higher earner’s basic rate Income Tax band by the amount of the gross contribution. So, by making a pension contribution, any tax on a capital gain realised in the same tax year can potentially be reduced from 20% to 10%.
For example, if an investor is able to make a gross pension contribution of £10,000, the point at which the higher CGT rate becomes payable will increase from £46,350 to £56,350. If the capital gain falls within the extended basic rate band, the CGT liability will become 10% instead of 20%.
5. Make use of losses
Of course, selling investments can lead you to realise losses as well as gains, and these losses can be offset against gains. So, if your gains are going to exceed your annual CGT allowance, you could sell an investment standing at a loss. The crystallised loss could then be used to reduce your gain to within the CGT annual allowance, thus reducing or even eliminating any CGT liability.
“CGT is a complicated subject, but through the effective use of the CGT annual allowance, you may be able to reduce the impact of the tax on your investment gains,” advises Obi Nnochiri of St. James’s Place.
“However, it’s also important to be careful to avoid the tax tail wagging the investment dog when you’re considering any form of tax planning, so you should always get financial advice before taking any decisions.”
The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.
The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.
1 Office for Budget Responsibility, 2018