Early advice is key to having your tax planning in order
Capital Gains Tax (CGT) is a type of taxe levied on gains made from the sale of specific categories of assets. Gains are computed by deducting the purchase price and any associated expenditures (such as sales taxes) from the selling price. To discourage speculation, they are normally taxed at a greater rate than income taxes. Now we know what they are, how can we minimise capital gains tax? The burning question.
If you want to sell valuable assets such as real estate, stocks, or bonds, you should be aware of CGT and how it might influence your bottom line. Proper preparation might help you reduce or even eliminate CGT liabilities.
For many years, the yearly CGT exemption has been a valuable means of minimising your CGT liability on any gains made from investments or asset disposals. However, with the announcement in last year’s Autumn Statement that this exemption will be reduced to £6,000 in 2023/24 and £3,000 in 2024/25, now is the time to act if you want to keep your tax-free allowance.
Use your losses to reduce capital gains
You may be allowed to deduct capital gains when reporting them to HM Revenue & Customs (HMRC). Reduce your tax obligation by utilising losses. Losses and gains realised during the same tax year must be offset against one other, which can assist reduce the overall taxable gain. Furthermore, any unused losses from previous years can be carried forward for use if reported to HMRC within four years of the end of the tax year in which the asset was sold.
It is critical to keep precise records of all losses and earnings in order to seek expert counsel when necessary. This might help you make the most of available reliefs and reduce your CGT obligation accordingly.
Using your spouse or civil partner to minimise capital gains
Couples and registered civil partners can transfer assets between themselves to take advantage of their joint yearly CGT exemption. As long as it is a true, outright gift, this is a tax-free transfer. Couples and registered civil partners who take advantage of this exemption might profit from higher capital gains opportunities that would not otherwise be accessible on an individual basis. The assets can be any sort of CGT-liable property or investment, such as stocks and shares, land, buildings, company assets, or personal goods. It is vital to remember that the transferred asset will be included in the receiving partner’s estate for Inheritance Tax purposes if they die.
This might result in a higher Inheritance Tax payment, therefore seek expert advice before making any transactions. Furthermore, if the transfer occurs after the asset’s value has increased, you should examine whether it would be better to pay CGT on the gain before transferring the item and use your single yearly exemption instead. This can be a great way to minimise capital gai
Pension contributions
Regular pension payments from relevant earnings are an extremely efficient approach to reduce CGT. A pension is an excellent option for people wishing to lower their CGT burden while maintaining the long-term security of their finances. Investing in pensions may not only make you more tax-efficient, but it may also offer you with piece of mind that your money will still be there when it is most needed.
You may effectively boost your income tax bracket by contributing to your pension. For example, if you contribute £10,000 to your pension plan in the 2022/23 tax year, the point at which higher rate tax becomes payable rises from £50,270 to £60,270.
As a result, any capital gain plus other taxable income now falls inside this expanded basic-rate income tax band, and CGT is now payable at 10% rather than 20% (18% on residential property gains).
Capital gains tax relief through the Enterprise Investment Scheme
CGT reduction on investments is available through Enterprise Investment Schemes (EIS). This tax relief is available for eligible investments in smaller, unquoted trade enterprises, and it can dramatically lower the amount of CGT owed while also giving other possible benefits. Gains on EIS investments are tax-free if held for at least three years from the date of issuance or the beginning of the qualifying trade. Furthermore, a capital gain can be deferred by investing it in an EIS eligible firm within one year before or up to three years after it arises.
When money is withdrawn out of an EIS eligible firm, the delayed capital gain is applied again. Professional guidance should always be obtained when investing in an EIS to ensure that you are making the best option for your specific circumstances. This programme is riskier than more typical investments, therefore participants must ensure that they fully understand the risks involved.
Wasting assets, chattels and other capital gains exempt items
Chattels are personal goods such as antiques and collectibles that are not necessarily subject to CGT. Wasting assets, defined as goods having a foreseeable life of 50 years or less, may be excluded from CGT entirely if they are not eligible for business capital allowances.
The CGT status for non-wasting chattels is determined by the sale profits, with those under £6,000 normally exempt from tax. If you are unclear about any part of CGT pertaining to your chattels, you should get professional advice to ensure that you are in compliance with the applicable regulations.
Professional advice to minimise capital gains tax
CGT is not something to be ignored. Getting professional advice on your own CGT sitaution and how to minimise capital gains tax is key. Speaking to someone who can help you understand your current situation and options going forward can drastically help when it comes to making the right decision for you. We provide bespoke advice and would be happy to help as and where we can just get in touch and we will take it from there.
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