5 Ideas to Mitigate a Capital Gains Tax (CGT) Bill
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Capital gains tax (CGT) is a tax that is often imposed on “profits” or “gains” when you sell (“dispose of”) something for a profit – such as an additional property, shares or certain personal possessions worth over £6,000.
CGT has come into sharp focus in 2023 as new tax rules came into force in April. Whereas in 2022, an individual could earn up to £12,300 in capital gains (outside of an ISA) without a tax liability, this tax-free allowance (called the Annual Exempt Amount) is now £6,000 in 2023-24.
Next year in 2024, the Annual Exempt Amount is expected to fall even further to £3,000 per year. Naturally, many investors are wondering how they can make their portfolios more tax-efficient and keep more of their hard-earned gains.
In this article, our Norwich financial planners offer 5 ideas to help with this. We hope this content is helpful. If you want to discuss your financial plan with us, please get in touch to arrange a no-obligation financial consultation, at no cost to you:
01603 789966
#1 Manage your income
The rate of income tax that you pay has a big impact on your CGT rate.
In 2023-24, a basic rate taxpayer (20% income tax) pays either 10% (on investment gains) or 18% (on residential property) on their chargeable gains. For an individual paying the higher rate, however, the CGT rates are 20% (investments) or 28% (property).
Therefore, certain taxpayers – e.g. those earning just above the higher rate threshold – could potentially reduce their CGT rate by 10% by exploring strategies to lower their income tax rate to the basic rate, such as salary sacrifice for pension contributions.
#2 Be strategic with your allowance(s)
In 2023-24 you can generate up to £6,000 in capital gains outside of an ISA without a CGT bill. When the next tax year arrives, this is expected to fall to £3,000.
One idea to mitigate needless CGT is to spread out your asset disposals across multiple tax years. For instance, if you make £9,000 in capital gains in 2023-24 alone, then £3,000 will be subject to CGT. However, if you make £6,000 this year and £3,000 next year, no CGT is due.
If you are married or in a civil partnership, then remember that your partner is also entitled to their own Annual Exempt Amount. You can also make tax-free asset transfers between you (if certain conditions are met and the transfer is a genuine gift of beneficial ownership).
This could allow a household to further reduce its CGT liability by making use of both partners’ tax-free allowances. For example, suppose you want to sell some assets which will generate £12,000 in capital gains. By transferring half of the assets to your spouse, you could both dispose of the assets in 2023-24 without a CGT bill.
#3 Use your ISA
An individual can put up to £20,000 into his/her ISA each tax year. Here, you might choose to invest your money into a stocks and shares ISA where the assets can generate tax-free dividends and capital gains – without impacting your Annual Exempt Amount.
Your spouse or civil partner also has their own ISA allowance. Together, this could grant a household a combined £40,000 annual ISA allowance.
#4 Explore your business options
If you are a business owner, there may be additional options open to you for mitigating CGT.
Gift Hold-Over Relief, for instance, can allow you to give away certain assets – or sell them for less than they are worth (to help the buyer) – without a CGT bill. However, the recipient will eventually pay CGT when they sell them.
Business Asset Disposal Relief can be another useful tool for owners. This allows you to reduce CGT on gains from certain business asset disposals – down to 10%.
Conclusion & invitation
If you are interested in discussing your own financial plan or investment strategy with us, please get in touch to arrange a no-commitment financial consultation at no cost to you:
01603 789966
