CGT bills hit record levels – and could soar even further
The amount of Capital Gains Tax (CGT) we pay has been skyrocketing in recent years.
In the 2020/21 tax year, the Government's take stood at £11.1 billion, but this jumped to £14.9 billion in 2021/22 and the Office For Budget Responsibility estimates it will hit a record £15.9 billion in the current tax year.
Worryingly for investors and landlords (who generally pay the tax), CGT bills look set to skyrocket even further as the Government is about to make it far harder to avoid the tax.
So it makes sense to take steps to cut your bill sooner rather than later.
This guide is part of a larger guide on '20 ways to pay less tax': read the full version here
Make the most of this year's CGT allowance
Capital Gains Tax (CGT) is charged on the profits you make when certain assets are sold or transferred.
However, everyone gets a CGT Allowance and you only pay tax on gains made above your this.
The good news is the annual allowance currently stands at £12,300, which is the largest it has ever been.
The bad news is the Government is about to dramatically slash your allowance.
Starting in the 2023/24 tax year (which begins April 6), it'll be more than halved to £6,000 and will then fall to a meagre £3,000 in 2024/25.
That makes it especially important you make the most of this year's allowance if you can.
Sarah Coles, head of personal finance at Hargreaves Lansdown, explains how: "If you’re sitting on gains outside an ISA or pension, you can sell up, make a gain of up to £12,300, and pay no CGT.
"If you haven’t used your ISA allowance yet this year, you can move up to £20,000 of the assets into an ISA wrapper, so you don’t have to worry about tax on gains on these investments ever again.
"If you’re married or in a civil partnership, you can transfer the ownership of some assets to your spouse or civil partner.
"There’s no CGT to pay on the transfer. When they sell up, there may well be tax to pay, and the gain will be calculated by comparing the cost on the day of selling with the day when their spouse originally bought the asset.
"However, they have a CGT allowance of their own to take advantage of, so a chunk of the gain won’t be subject to tax. If they’re taxed at a lower rate, they may also pay any CGT at a lower rate too.
"You should also consider dividend tax when realising gains and moving assets into an ISA.
"The tax allowance for this is also being cut from £2,000 to £1,000 in April – and to £500 a year later – and many people choose to prioritise moving income-producing assets into the ISA, because income tends to be taxed at a higher rate and can’t be planned for as easily as a capital gain.”
Calculating your CGT bill
The rate of CGT currently depends on whether you're a Basic Rate or Higher Rate or Additional Rate taxpayer.
For Higher Rate or Additional Rate taxpayers this is simple: it's 28% on your gains from residential property or 20% on your gains from other chargeable assets.
Unfortunately for Basic Rate taxpayers, the situation is a little more complicated:
Start by working out your annual income, minus the Personal Allowance (currently £12,570) and any other tax reliefs you receive.
Take that figure and add your capital gains from the year.
Then reduce that number by the Capital Gains Tax allowance (currently £12,300).
Is the figure you come out with less than £50,000? If so, you'll pay 10% tax on your gains or 18% on residential property.
Any amount above £50,000 will be charged at 20% on gains and 28% for residential property.
List of tax codes: check you're on the right UK tax code for 2022/23
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 2022/23 and then sell more on or after 6 April 2023.
By doing so, you can take advantage of both years’ CGT allowances, currently worth a total of £18,300.
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.
You can't claim a loss for selling an asset to a 'connected person', such as a family member or business partner.
Gift assets to your spouse
Transfers between spouses is currently exempt from CGT. So by gifting assets to your spouse (or Civil Partner), you take advantage of both CGT tax-free allowances amounting to £24,000.
Alternately, you could transfer partial ownership to a spouse – useful if your spouse is on a lower tax band then you.
Bed your spouse
No saucy remarks, please!
Another way married couples and civil partners can avoid CGT is by one spouse or civil partner 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 broker.
Get an ISA
Over 19 million Brits use a popular tax shelter known as an Individual Savings Account (ISA) to keep income and capital gains safe from the taxman’s grasp.
In this tax year, investors can put up to £20,000 into an ISA of which all can be in cash or stocks and shares, or a combination of the two.
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 safe from HM Revenue & Customs' reach.
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 £20,000 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.
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.
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.
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.
It's important to talk to a qualified advisor before even considering these schemes.
Reduce taxable income
The rate of CGT is charged based on the rate of Income Tax paid.
Therefore lowering taxable income in any one year could reduce the CGT rate from 20% to 10%, or 28% to 18% if you are selling residential property.
Reducing taxable income can be done in a number of ways: waiting for retirement and a change from earnings to pension income; salary sacrifice through pension contributions or childcare vouchers, deferring the State Pension or transferring taxable income bearing assets such as cash deposits to a lower-earning spouse.
Passing on property: gifts, Inheritance Tax & trusts explained
Let the taxman know
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!