Capital Gains Tax receipts at £9.5 billion – How to reduce your bill and plan for possible reforms
Capital Gains Tax (CGT) is a levy which has to be addressed by many individuals at some point in their lifetime and new statistics reveal that receipts are at an all-time high.
According to figures from HMRC, CGT revenue rose to an all-time high of £9.5billion in the 2018/19 tax year which was an increase from £8.8billion the previous year.
It is worth noting the number of people who were required to pay the tax did fall slightly. In 2018/19, 276,000 taxpayers had to meet a CGT bill compared to 281,000 in 2017/18.
What is CGT?
CGT is a tax on the profit when you sell (or ‘dispose of’) something (an ‘asset’) that’s increased in value.
It is the gain which is made on the sale which is subject to tax, rather than the amount of money a person receives.
CGT must be paid when individuals sell certain items known as chargeable assets. These include:
- Most personal items worth £6,000 or more, aside from a car
- Property which is not a person’s main residence
- A main home if it has been let out, used for business or it is very large
- Shares not in an ISA
- Business assets
Because a CGT bill can be substantial, people often look for legal ways to reduce the final amount they have to pay.
How can I reduce my bill?
ISAs and Self-Invested Personal Pensions (SIPP)
These forms of investment are often free from taxes on income and gains, and you can save £20,000 and up to £40,000* a year respectively. *Some people may have a higher or lower limit than this depending on their circumstances.
Use your allowance
You can take advantage of the annual CGT exemption, which stands at £12,300 in the 2020/21 tax year. This is a “use it or lose it” allowance, meaning you can’t carry it forward to future years. Each individual has their own allowance though, so a married couple can potentially realise gains of £24,600 this tax year without incurring any tax liability.
CGT is usually not paid on gifts made to spouses or civil partners, so it might make sense to transfer holdings to a spouse in a lower tax bracket or one who hasn’t used their allowance. By transferring assets in this way, you can take advantage of your combined CGT allowances. This is only effective if the gifts are genuine and unconditional.
It might also be sensible to split gains over two tax years to make use of both years’ allowances.
Offset losses against gains
Gains and losses realised in the same tax year have to be offset against each other which will reduce the amount of gain that is subject to tax. If your losses exceed your gains, you can carry them forward to offset against future gains, provided you have registered those losses with HMRC within 4 tax years of the loss being made.
Bed and ISA
This is when you sell investments and immediately buy them back within a tax-efficient ISA wrapper. It can be an efficient way to help use up your ISA allowance and make your portfolio more tax-efficient because future gains will be free of CGT.
Manage your taxable income levels
The rate of CGT you pay is dependent on which income tax band the taxable gain falls into when added on top of your income, so reducing your income tax rate can have a knock-on benefit on CGT. Simple ways to reduce your taxable income are through pension contributions or charitable donations, for example.
Beware you don’t pay twice!
Capital gains are wiped out on death, so your estate will potentially pay inheritance tax (IHT) rather than CGT. Incurring CGT by selling assets later in life can effectively mean you pay tax on the same assets twice.
CGT reform might be on the horizon – plan now
A review of CGT for individuals and small businesses has been promised, meaning it could be time to carry out a review of your assets to see if any planning can be done now.
It has been speculated the Treasury could be looking to increase CGT in the coming months especially as doing so could raise money to help meet the enormous cost of the coronavirus crisis.
Rates of CGT can vary between 10% and 28% so are significantly lower than the top rate of income tax at 45%. Could we see a move to align theses rates? As we already receive a personal allowance for income of £12,500 might the £12,300 CGT allowance be abolished? Could assets which are currently exempt from CGT such as your main home become chargeable?
No-one knows if and when any changes will take place although the Office of Tax Simplification (OTS) is running a consultation due to end on 12 October which could give Mr Sunak the opportunity to act in the Autumn Budget.
Ge in touch now to see if any planning can be done ahead of this.
The information was correct at time of publishing but may now be out of date.