Capital gains tax (CGT) is one of those things most people don’t think about until they need to.
Until you decide to sell a property, shares, or another asset that’s gained value since you bought it, you might not have given this form of tax much consideration at all.
To make things trickier, it’s a particularly complex tax, with different rules to understand for different types of assets. Because of that, a lot of people end up missing out on the reliefs and exemptions available to them, and paying much more than they really need to as a result.
In the first part of our ‘Ask the expert’ series, I’ll be talking you through the various options for minimising CGT, from making the most of allowances to thinking strategically about the ownership of your assets.
Use up your allowance
First of all, it’s important to remember your annual exempt amount for CGT cannot be carried over, so to make the most of it you should aim to use all of it in each tax year.
This allowance stands at £12,300 in 2020/21, or £6,150 for trusts. To use it effectively, you should be planning reasonably well in advance before selling any assets. Think about what you might be selling in the years to come, and work out whether doing so will use up your allowance or whether you can time the sales so that you use the full amount each year.
Transfer your assets
Everyone has their own annual exempt amount, so if you’re married or in a civil partnership, it may be wise to consider the way you share out assets between the two of you to maximise both allowances.
There’s no CGT to pay on assets you give or sell to your spouse or civil partner, unless you are separated and did not live together at all in that tax year, or the assets you give are goods for their business to sell on.
Bear in mind that they may still have to pay tax if they sell the asset at a later date.
Offset your losses
If you make a loss, you can report it to HMRC and have the amount deducted from the gains you made in that tax year.
If your taxable gain is still above the tax-free allowance after that, you can deduct any unused losses from previous tax years.
You have to report any losses to HMRC within four years after the end of the tax year that you disposed of the asset, but there’s no time limit for using them to offset your gains, so you can keep using them however long ago they were made.
If you’ve claimed enough losses in one year to reduce your taxable gain to below the annual exempt amount and you still have more to report, it’s generally a good idea to save them – you’ll be able to claim them next year instead, or the year after that, and so on.
You can’t do this if you’ve sold or given the asset to your spouse or civil partner, however, or a ‘connected person’ such as a relative or business partner.
Invest in pensions or ISAs
The rate of CGT you pay will depend on your taxable income, so you may be able to reduce it by lowering your income – for example, by increasing your pension contributions.
Another advantage of this is that assets held in pensions are not liable for CGT.
Stocks and shares ISAs can also be a tax-efficient option. These allow you to pay in up to £20,000 a year to potentially be invested through the ISA, and any gains made on your investments within this wrapper will be tax-free.
One way to make the most of those exemptions is what’s known as ‘bed and ISA’ or ‘bed and SIPP’. These processes involve selling investments and buying them back using an ISA or a self-invested personal pension (SIPP). Both can have tax advantages, but as always, it’s best to take professional advice before committing to any investment product.
Make use of specific reliefs
We’ve touched on a few key areas here, but there are various other situations where specific reliefs or strategies can help you reduce your tax bill.
If you’re selling a business, you could benefit from business asset disposal relief, which was previously known as entrepreneurs’ relief. Or, if you sell a property you’ve let out at some point, you should check your eligibility for lettings relief.
Whatever your situation, we’re here to offer advice and let you know about any opportunities available to you.
Talk to us about how Mayflower can help keep your tax bill under control.