Much gets made about the levels of income tax people pay but another tax you should be aware of is capital gains tax (CGT). This is charged on the profit or gain made when selling, gifting, transferring, exchanging or disposing of an asset. Some assets, such as your home and any personal belongings worth less than £6,000, are exempt from CGT. However, assets such as shares, collective investments and second properties that generate a capital gain are generally liable to CGT, so if you are an investor this should be of particular concern to you.
But with careful planning you can eliminate or reduce the amount you pay. "Although the current CGT rates are historically low (CGT has been charged at 40 per cent in recent years) and many individuals will never pay it, there are a number of ways in which CGT can be reduced or even removed altogether," says John Fletcher, director of financial planning at Brewin Dolphin.
He sets out 10 ways in which you can mitigate your bill.
1. Make use of the CGT Allowance
Everyone has an annual CGT allowance that runs from 6 April to 5 April, which for many investors is sufficient for avoiding a CGT liability as it lets them make gains on investments of up to £11,000 free of tax for the 2014-15 tax year. If unused, the allowance cannot be carried forward into the next tax year, so it is advisable to use it each year in order to reduce the risk of incurring a significant CGT bill in subsequent years.
But if you have a larger portfolio and trade frequently, any gains in excess of the allowance are charged to CGT at either 18 per cent or 28 per cent, depending on your other total taxable income in the year the gain arises. Gains which when added to taxable income fall in the basic-rate tax band pay 18 per cent, and gains which when added to taxable income fall in the higher or additional rate tax band pay 28 per cent.
2. Make use of losses
Sell some assets at a loss if the overall gain in the tax year exceeds the annual allowance. Gains and losses established in the same tax year must be offset against each other, so it will reduce the amount of gain that is subject to tax. Losses must be registered with HM Revenue & Customs within four years from the end of the tax year in which the loss has occurred.
3. Transfer assets to your spouse or civil partner
Transfer of assets between spouses and civil partners is currently exempt from CGT. This enables one partner to transfer assets to the other in order to use a second CGT allowance, effectively doubling his CGT allowance.
4. Bed and spouse
Investors are no longer allowed to buy back the same shares within 30 days if they intend to crystallise a capital gain. However, spouses or civil partners are permitted to buy back the shares sold by their spouse or civil partner immediately, so the gain is realised CGT free while enabling the family to retain the assets.
5. Bed and Isa
Gains (and losses) held within an individual savings account (Isa) are exempt from CGT so it makes sense, particularly for higher-rate taxpayers, to use their Isa allowance each year. As of this month, you can invest up to £11,880 in a stocks and shares Isa, and from July this rises to £15,000 when all of this can be invested in stocks and shares, cash or both. This means that a married couple or civil partners can invest up to £30,000 each year in this tax privileged investment. As with the bed and spouse option, a bed and Isa involves selling assets to realise a capital gain and then immediately buying back the same assets inside an Isa. This enables all future gains on the asset to be CGT free.
6. Contribute to a pension
By making a pension contribution (where one has net relevant earnings) the tax on a capital gain can be reduced from 28 per cent to 18 per cent. A pension contribution extends the upper limit of an individual's income tax band by the amount of the gross contribution. For example, if an investor is able to make a gross pension contribution of £10,000, the point at which higher rate tax becomes payable will increase from £41,865 (limit for 2014-15) to £51,865. If the capital gain, once added to the other taxable income in the year the gain is realised, falls within the extended personal allowance, the CGT liability will become 18 per cent instead of 28 per cent.
7. Give shares to charity
If you give land, property or qualifying shares to a charity, or sell them to a charity at less than the market value, income tax relief and CGT relief are available.
8. Invest in an EIS
Any gains made on investments in an Enterprise Investment Scheme (EIS) are free from CGT if held for three or more years. If the shares are disposed of at a loss, you can elect for the amount of the loss, less any income tax relief given, to be set against income for the year in which the shares were disposed of - or any income for the previous year - instead of being set against capital gains. CGT deferral relief is available to individuals and trustees of certain trusts. The payment of tax on a capital gain can be deferred where the gain is invested in a share of an EIS qualifying company. The gain can arise from the disposal of any kind of asset, but the investment must be made within the period of one year before or three years after the gain arose. There is no minimum period for which the shares must be held; the deferred capital gain is brought back into charge whenever the shares are disposed of, or are deemed to have been disposed of under the EIS legislation. The downside of EIS is that generally these types of schemes are higher risk than traditional stocks and shares.
9. Hold over relief
Hold over relief is available on certain assets on which you have made a gain but have then given away, for example to a relative. Where hold over relief is claimed the chargeable gain is postponed, usually until the transferee disposes of the assets. Hold over relief may be claimed for gifts:
■ of business assets;
■ of unlisted shares in trading companies;
■ of agricultural land; and
■ which are chargeable transfers for inheritance tax (IHT) purposes.
It can also be claimed for certain types of gifts which are specifically exempted from IHT.
10. Chattels that escape CGT
Possessions such as antiques and collectibles are called chattels, and gains on some of these are tax free. Items with a predicted life of 50 years or fewer, known as wasting assets, are CGT free, provided they were not eligible for business capital allowances. Antique clocks, vintage cars, pleasure boats and caravans are among items treated as wasting assets.
If the gain is not tax free, CGT is charged in a special way. The taxable gain is the lower of the actual gain or five-thirds of the excess of the final value over £6,000.
Read more on how to reduce your CGT bill
