Ten ways to avoid Capital Gains Tax
Investors and landlords can use these tricks to dodge the new 28% rate of CGT...
Each of us has a yearly tax-free capital gains tax (CGT) allowance (£10,600 in 2012/13), so only gains above this tax-free band are liable to CGT. If you're a basic rate taxpayer you'll pay a CGT rate of 18%, if you're a higher-rate taxpayer you'll pay a CGT rate of 28%.
However, when working out whether you need to pay 28% CGT, you need to add your net gains to your other income (both earned and unearned). If these two sums combined exceed the threshold for higher-rate tax (£34,371 for most of us), then you’ll be liable to pay CGT at 28%.
Hence, if you want to avoid paying CGT at 28%, then you can do two things: minimise your net gains and/or reduce your income so as to drag gains back into the lower 18% CGT band.
These ten tricks enable you to do just that:
1. Spread gains over tax years
Instead of selling, say, a whole heap of shares all in one go, you can split your sales over two or more tax years. For example, you could sell some shares in 2012/13 and then sell more on or after 6 April 2013. By doing so, you can take advantage of two years’ CGT allowances totalling £20,200.
2. Offset losses against gains
When calculating your CGT bill, you deduct capital losses from capital gains in order to arrive at your net gain. For example, a gain of £25,000 minus a loss of £10,000 produces a net gain of £15,000.
Therefore, by crystallising losses in the same tax year as gains, you can bring down your tax bill. Also, in most cases, losses made up to four years ago can be offset against current gains.
3. Gift assets to your spouse
By gifting assets to your spouse (or same-sex Civil Partner), s/he can use his/her yearly CGT allowances to minimise your CGT bill as a couple. Doing this could save you up to 28% x £10,100 = £2,828 a year, which is not to be sniffed at.
4.Bed your spouse
No saucy remarks, please!
Another way married couples and Civil Partners can avoid CGT is by one spouse selling assets to crystallise a gain, while the other spouse buys them back. This ‘bed and spouse’ technique to crystallise gains doesn’t work for outright gifts, as these do not attract CGT. Instead, one spouse must, say, sell shares to a broker while the other simultaneously buys them back from the same.
5. Get an ISA
Over 19 million Brits use a popular tax shelter known as an ISA (Individual Savings Account) to keep income and capital gains safe from the taxman’s grasp.
In this tax year, investors can put up to £11,280 into an ISA (of which £5,640 can be in cash). Gains made inside an ISA are free from CGT, so an ISA is one of the best defences against paying needless tax. Over many years, some investors have built up six-figure sums inside ISAs, all protected from HM Revenue & Customs (HMRC).
6. Bed and ISA
As with the ‘bed and spouse’ technique, ‘bed and ISA’ involves selling assets (such as shares, investment funds and bonds) to produce a capital gain and then immediately buying back the same assets inside the safety of an ISA.
Thus, you could sell directly held assets worth up to £11,280 and then use the proceeds of this sale to fund a near-identical purchase (after dealing charges) inside an ISA. This enables all future gains on this asset to avoid CGT.
7. Bed and SIPP
Another sell-and-buy-back technique is ‘bed and SIPP’ which involves -- you guessed it -- selling assets and then buying them back inside the shelter of a pension known as a Self-Invested Personal Pension (SIPP). All income and gains made inside a SIPP are tax-free, making it a very popular option for saving towards retirement.
8. Invest in small companies
By investing in special tax-efficient programmes which provide funding to small businesses, you can reclaim some -- if not all -- of the income tax and CGT you’ve previously paid.
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These schemes, known as Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EISs) are usually extremely risky, so they are best left to experienced and wealthy investors. A good source of info on VCTs and EISs is the Tax Shelter Report.
9. Make extra pension contributions
By making additional payments into your company or personal pension, you reduce the amount of your earned income which is liable to income tax. For instance, paying £10,000 of a wage of £50,000 into a pension reduces your taxable income to £40,000.
Indeed, by paying around a third (33%) of her pre-tax income into her pension, my wife bags a large chunk of tax relief while, at the same time, building an even bigger retirement income. What’s more, her lower taxable income reduces her CGT bill, too.
10. Choose childcare vouchers
Lastly, parents with children aged 15 or below can bring down their taxable income with the help of childcare vouchers. Each parent can sacrifice up to £243 a month of their salary in return for the same amount in tax-free childcare vouchers (although if you're a higher-rate taxpayer joining a scheme now you can only get £124 of vouchers tax- and National Insurance-free a month). In effect, this reduces taxable income by up to £2,916 a year, producing a yearly saving of up to £1,195 in income tax and National Insurance contributions.
And as childcare vouchers lower your taxable income they enable more of your capital gains to be taxed at 18% instead of 28%. Eureka!
One final warning
Finally, while ‘tax avoidance’ is legal, ‘tax evasion’ is illegal. So don’t be tempted to sell assets without declaring any gains to HMRC. Defrauding the taxman could land you with a hefty fine and even a prison sentence!
This is a classic lovemoney article that has been updated
More on tax:
Six easy ways to pay less tax